Join Jim Stice for an in-depth discussion in this video Income statements, part of Finance for Non-Financial Managers.
- The second primary financial statement is the income statement. The income statement tells us revenues minus expenses, and that equals net income. We use the term revenues and expenses all the time, so let's make sure we know what these words mean. In an accounting context, revenue means the amount of assets generated in doing business. And different companies generate assets in different ways. Walmart, for example, generates assets by putting things on shelves that you and I buy. We pay Walmart more for the inventory than they themselves paid for it.
That's how Walmart creates assets. Microsoft creates assets by creating software and hardware that you and I then buy and we pay Microsoft for those things. Disney has consumer products. They have cruises, they have theme parks. We pay to use those things or to buy those products, and that's how Disney generates assets. Revenue is the amount of assets generated in doing business. Hopefully, the assets generated are less than the assets consumed. Expenses are the amount of assets consumed in doing business.
For example, Microsoft consumes assets by paying programmers and by paying for equipment. Walmart consumes assets by buying the inventory that they then sell to you and me, and then paying rent by having buildings depreciate, by paying its employees. McDonald's consumes resources by buying food, buying paper, by renting facilities. In each case, the revenues hopefully are more than the expenses that are consumed in generating business. All of this is put together in the income statement.
Net income equals revenues minus expenses. Now, net income is a very sophisticated economic measure. It's the net amount of assets generated by a business through its business operations. This is the income statement. Now let's look at the income statement for some companies of which you've heard. Facebook, Google, Microsoft and Apple. All of these companies have income statements that they release to the public on a regular basis. Now, take a look at these. First of all, you see a difference in scale.
Apple is so much larger than Facebook. In fact, Facebook is the smallest company on this list in terms of revenue. Yet, we talk about Facebook so much. This illustrates an important point. The financial statements are only one measure of a company's performance. A very important measure, but only one measure. Now why do we talk about Facebook so often? Because for Facebook, its operations now are only a small fraction of what we think they're going to be in the future. Facebook is expected to grow substantially in the future.
So we talk a lot about them now. The point with the income statement is this. A company increases its net assets through profitable operations. You can see that for each of these four companies, they've all been very profitable. As a result, their net assets increase year after year.
- Interpret financial reports and make decisions based on available data
- Manage inventory and receivables
- Create an accurate budget
- Cost a product or service
- Analyze customers
- Understand your income taxes
- Communicate your contribution to the bottom line