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MSE608C – Engineering and Financial
Cost Analysis
The Income Statement
The Income Statement
• Balance Sheet
– The financial condition of the company on a certain
date (a snapshot on that date)
– What is OWNED and what is OWED
– The format is the Fundamental Accounting Equation
• Income Statement
– The financial performance of the company over a
period of time (the accounting period)
– Changes in Revenue accounts and Expense accounts
(profit or loss over the period)
– The format is Revenues - Expenses = Profit (Loss)
Revenues and Gross Profit
REVENUES – COGS = GROSS PROFIT
Operating Expenses
• Operating Expenses are those expenses required
for general operation of a business
• Gross Profit – Total Operating Expenses = Operating Profit
Other Income and Expenses
• Net Income =  Retained Earnings
What are Revenues and Expenses?
A = L + OE
Asset
+
Owners’ Equity
Liabilities
=
-
+
+
-
INVESTED CAPITAL
-
+
RETAINED EARNINGS
+
EXPENSES
-
+
REVENUES
+
Accrual vs. Cash Basis
• Accrual accounting records Revenues and
Expenses WHEN THEY OCCUR regardless of
when cash is paid.
– Revenues are recorded when goods or services are delivered.
– Expenses are recorded when the goods or services are received.
– Revenues and Expenses are better matched to the same accounting
period.
• Cash Basis accounting records Revenues and
Expenses WHEN CASH is exchanged.
– Cash Basis is most common in small businesses and our personal
lives.
Who Can Use the Cash Method?
•
•
•
Although the IRS allows all businesses to use the accrual method of
accounting, most small businesses can instead use the cash method for tax
purposes. The cash method can offer more flexibility in tax planning because
you can sometimes time your receipt of revenue or payments of expenses to
shift these items from one tax year to another.
However, some businesses must use the accrual method: corporations that are
not S corporations and partnerships that have at least one corporation (other
than an S corporation) as a shareholder. There are some exceptions to these
restrictions — the cash method is available for farming businesses and entities
(including corporations) with average annual gross receipts of less than five
million dollars for all prior years.
Tax shelters may never use the cash method. If your business has inventories,
you must use the accrual method, at least for sales and merchandise purchases.
Balance Sheet or Income Statement?
ACCOUNT
Accounts payable
Accounts receivable
Cash
Capital Stock
Delivery equipment
Delivery expense
Delivery revenue
Insurance expense
Loans payable
Notes payable
Office equipment
Prepaid insurance
Rent expense
Retained earnings (on April 30th)
Wages expense
BALANCE
$10,200
23,000
8,000
25,000
22,000
1,300
12,000
500
10,500
3,500
3,700
2,000
1,500
8,000
7,200
What are the Accounting
Transactions?
1. You purchase 6 months of prepaid rent at
$1000 per month.
2. At end of accounting period (month) you
account for rent.
Balance Sheet or Income Statement?
What are the Accounting
Transactions?
1. You purchase $500 of supplies for your
business.
2. You consume $100 of supplies during the
accounting period.
Balance Sheet or Income Statement?
What are the Accounting
Transactions?
1. You purchase a motor for $500 which you will
eventually modify (labor only) and sell as the
product of your business.
2. You modify a motor, using $100 of labor only,
and put it into finished goods waiting to be sold.
3. You sell a modified motor for $1000.
Balance Sheet or Income Statement?
Assessment
• What is the primary difference between the
Balance Sheet and the Income Statement?
• Owners Equity is comprised of what two
components?
• What is the bottom line of the Income
Statement?
• Net Income is the same as __________ ?