Income Statement: A Closer Look at Your Financial Audits

Statement of Financial Affairs by Nick Youngson - CC BY-SA 3.0

If you are a business owner in New Jersey, then you know the struggles of keeping your finances in check. Keeping track of what your company does on a day to day basis is a must if you want to stay competitive in the world of business. This is why most businesses seek the aid of an accounting service because it plays a crucial role in managing the financial statements of a company. These statements are essentially the records that show the results of operations, cash flow, and financial position of your business. 

Now, you might be wondering what these financial statements are. Well, there are three key statements that you will need, a balance sheet, a cash flow statement, and an income statement, all of which are intertwined with each other. But for now, let’s focus on the income statement because it will be of great help for both established and start-up businesses. 

An income statement’s main purpose is to show the profitability of a company over a period of time. This, in turn, will help your businesses' financial plan, by giving you an overview of what is going wrong and right in your operation.

Other than helping you manage your business, the reason you need an income statement is that it can boost the image of your company in the eyes of the public. This simple yet important financial statement is a tool used as a company’s profitability analysis that entices prospective investors to take part in your venture. It also is a factor for financial institutions in deciding whether your business is eligible for a loan.  There are more benefits to having an income statement, but let’s first take a closer look into what comprises this financial audit. 

The information that an income statement provides can be broken down into three categories, sales, expenses, and profit. Let’s now look at them individually in order for you to understand what each detail is for.

Sales

This is probably the easiest to understand. Sales basically mean how much money you earned from selling the product or services that you provide. But do not get this mistaken as your company’s total profit; because part of the payment you received will then be used to continue your business’ operation. With that established, this brings us to our next point.

Expenses

Now that you have the total amount of sales, your overall expenses must then be calculated. This is done so that you can see your company’s overall profit. However, looking at your total expense isn’t simply calculating your business’ financial transactions, it must be further broken down into two parts. Which include Cost of Goods Sold (COGS) and Company Operating expenses. 

Let us differentiate the two by using an example: 

So, let’s say that your Kearny, NJ business sells hotdogs. Your COGS will include how much the bun, meat, and condiments costs. You can think of it as your investment in the product that you provide. On the other hand, your operating expenses will be the salary of the employees, the rent for your establishment, and other costs to operate and manage your business. To simply put it, anything that has to do with the production of your product will be part of your cost of goods sold, while everything that has to do with actually selling the product will be your operating expense. Both of these company expenses will be used by your certified public accountant to calculate your net income.

Profit

And this is where it all boils down to, profiting from your business is the main goal of your endeavors. And this is where you will see whether your company is doing well or not. As a reference to the calculations that will be explained in this part. Here are the income statement formulas that will be used to determine your net income.

Gross Profit = Revenues – Cost of Goods Sold

Operating Income = Gross Profit – Operating Expenses

Net income = Operating Income + Non-operating Items

These equations are used for the final financial analysis of your business. But what do these terms mean? Let’s go back to the Kearny, NJ hotdog business example we used earlier.  So, you sold a hotdog, you then calculate the basic cost of how much it is to produce your product. You then subtract it how much you are charging for it, whatever is left will be your gross profit for that sale. Moving on to your operating income, it will be how much you paid in operating expenses for that sale. Then, you add both of those variables together and you get the net income for that one transaction. 

And that concludes a brief rundown of what an income statement includes and what it is used for. Then again, this is but an oversimplified way of looking at this financial statement. You should always opt for a professional accounting service to manage and look over these crucial financial audits. These accounting service providers would definitely give a better and more detailed explanations as to why and how income statements are prepared for the sake of your business.  

If you need accounting services near Kearny, NJ, we at Nicholas J. Coco, CPA are the ones to call. We provide CPA services that can handle your corporate taxes and any other bookkeeping needs you might have. We know the struggles of keeping up to date with all your finances, so let us help you by availing yourself of our premium accounting service. You can get a hold of us through our phone number at 201-955-3100 or through email. You can also visit us at 752 Kearny Ave Kearny, NJ if you wish to discuss your concerns with us in person.

Whether you’re looking for financial analysts or tax accountants near your area, Nicholas J. Coco, CPA can definitely assist you.

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