Learn how to identify the components of the income statement.
- The second primary financial statement is the income statement, revenues minus expenses equals net income. This is the financial statement that people talk about all the time. We use the terms 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. 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. Think of revenue as another way for a company to acquire assets. Just as assets can be acquired by borrowing or by owners' investments, assets can also be acquired by providing a product or service for which customers are willing to pay. Now, hopefully, the assets generated are less than the assets consumed. Expenses are the amount of assets consumed in doing business. Expenses are the costs incurred in normal business operations to generate revenues. For example, Microsoft consumes assets by paying programmers and by paying for equipment. Walmart consumes assets by buying the inventory they sell to you and me and by paying rent, by depreciating their buildings, and by paying their employees. McDonald's consumes resources by buying food, buying paper, 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, revenues minus expenses. Net income, sometimes called earnings or profits, is an overall measure of a company's performance. Net income reflects the company's accomplishments, revenues, in relations to its efforts, expenses, during a particular period of time. 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. One final bit of information required on the income statement of corporations is earnings per share. This EPS amount is computed by dividing net income for the current period by the number of shares of stock outstanding during the period. Earnings per share information tells the owner of a single share of stock how much of the net income for the year belongs to him or her. We will use the income statement to understand if a company is earning lots of money or a little money. And if it's not very much, why not? We will ask the question, which expenses are causing problems? Well, there it is, the income statement, the second of the primary financial statements.
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