Definition and its Components
The income statement is a financial statement prepared for showing the revenues and expenditures of the company at a given period. The difference between revenues and expenditures is profit or loss, which is its main objective. It is also referred to as the statement of financial operation, profit and loss statement, or earnings statement, depending on the people using it. The income statement determines the financial position in terms of profit and loss earned from the revenues after subtracting expenses (Lucchese & Carlo, 2020). The elements of the profit and loss statement are the sales, cost of goods sold, gross profit, operating expenses, and net profit. When preparing the income statement, the cost of goods sold (the sum of opening stock and purchases minus closing inventory) is subtracted from sales to get gross profit. The net profit is simply the gross profit, less operating expenses such as distribution and selling and distribution expenses, general administrative, and financial expenses.
Elements of income statements are used in the calculation of the financial ratios of an organization. Some of the statements of comprehensive income are calculated in the percentage of sales to identify the ratios. For instance, the net profit margin is calculated by the net profit by the total sales of the company/institution. The financial position of an organization is therefore measured by the income statement’s elements when identifying the financial ratios. The equations formulated for an income statement, when compared with the previous years, helps managers to formulate decisions based on the trends of the performance.
Types of the income statement
The best type of income statement that can be used by an on-site operation is the contribution margin income statement. An on-site operation involves small daily transactions which best suits the contribution margin income statement. This type of income statement makes it possible for one to determine to break-even point of the business since the fixed costs are subtracted after the deduction of variables from the total sales. Arguably, schools use classified income statements to account for their income and expenditures. With classified income statements, subtotals are recorded by showing non-operating expenses, operating expenses and the gross margin. In most cases, schools involve many financial transactions in their operations hence the need of having a multi-step income statement when recording their transactions. Other types of income statements include comparative, condensed, and single-step income statements. An organization adopts different types of income statements depending on the nature of its business operations.
Inventory
Inventory is the crucial component for an income statement since it is used when determining the cost of goods sold in an entity. Closing inventory is subtracted from the stock at the beginning of the period to find the cost of goods sold (Lucchese & Carlo, 2020). Inventory management in an organization is significant as, through it, one can decide whether the new stock can be added to the organization. Through this, financial costs relating to stockouts are minimized in an organization. One has to ensure that there is the right stock in the organization with the right levels, at the right time and in the right place. The stock recording is done based on the quantity and type of the commodity being purchased in an organization. Goods purchased in small quantities and less costly can be recorded with respect to their package received together with other items. However, organizations normalize recording higher-priced items individually to facilitate accountability when auditing financial statements.
The FND 446 in the case study is used to show the inventory for food cost practice for the periods ending 31st Dec 2021 and 31st Jan 2022. Appendix 1 shows how inventories can be recorded in the income statement. Stocks of the food cost items are recorded individually for easy accountability. In December 2021, the total production was $5518.01, while the total meat was $31524.43. In January 2022, high productivity is anticipated whereby the product is expected to have 152%, meat cost at 76% and Total food cost at 82.7%.
XYZ foodservice shows how different components of income statements can be used as determinants of the financial stability of an organization. From Appendix 2, it is clear that every item in the financial statement has presented as a percentage of total sales. The total sales for the XYZ food service are $1,200,00 having a corresponding COG (cost of goods sold) of $414,500, which is 34.54% of the total revenues. Another component of the income statement is gross profit which stands at $785500 and showing is 65.46% of the total sales of the company. Controllable expenses, as one of the components of income statements, add up to 49.9% of the total sales. Furthermore, the profit and loss statement has been used in the calculation of financial ratios. The first ratio is net profit margin which is achieved by dividing net profit by the total sales. The margin ratio is 0.047, meaning that the company has 4.7% of every sale made.
Reference
Lucchese, M., & Carlo, F. D. (2020). Inventories Accounting under US-GAAP and IFRS Standards: The Differences That Hinder the Full Convergence. International Journal of Business and Management, 15(7), 180. Web.
Appendices
Appendix 1: FND 446: Food Cost Practice
Inventory: 31st Dec 2021
Inventory: 31 January 2022