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The financial document public companies use to report their income and expenditures is called an income statement. In a way it's the most disappointing of the financial documents, because it usually doesn't go into much detail. I'll go into more detail when I discuss how to create an income statement you can use it in the budgeting process, but let's take a look at the sample income statement for a fictitious company. The top line is Revenue. This is the amount of money that the company has made through sales, either of goods, services, or both. Then you get your operating expenses, what did it cost you to make that money.
So you have cost of revenue, which can include the cost of goods sold. In other words, how much did it cost you to make what it is that you're selling? Inventory costs, such as storage, warehouse rental, and so on, and then also any sales or volume discount that you've provided to your vendors. Companies will often offer a premium to other companies that buy their products if they buy in a certain quantity. You can include those volume discounts as part of your cost of revenue. Then you've other expenses including research and development.
What are you spending to move into new areas or create new products? Sales and marketing. Self-explanatory, and your general and administrative overhead. In other words, what does it cost to run and administer your business? When you add everything up, you have your total operating expenses. Then when you subtract your operating expenses from your revenue, you get your operating tncome. Now you need to include your other forms of income. In this case the company doesn't have any investments, which means that its income before income taxes is exactly the same as this operating income.
Again, expenses subtracted from revenue. Then you have your expected income tax bill, which will be $29,000, and you have your net income, the bottom line. You can learn a lot about a company by combining these numbers in what are called ratios. I described ratio analysis in my other course, Excel 2007: Financial Analysis. In this case, I'll just indicate that the company's net income has increased by about 100% over the past year, from $47,000 to $86,000.
All that analysis tells you a lot about the company and the way they're generating their income. The income statement offers the broadest possible view of a company's income and expenditures. If you're preparing a budget you'll need a more detailed picture to make accurate projections. I'll show you how to do that later.
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