Financial statements
The income statement
- Financial statements are official money records; companies must publish them yearly.
- The income statement shows revenue, costs and profit over a period:
$$\text{gross profit} = \text{revenue} - \text{cost of sales}$$
- after expenses → operating profit; after interest and tax → net profit.
Practice
Revenue is 90,000 and cost of sales is 55,000. What is the gross profit (in dollars)?
Gross profit = revenue − cost of sales = 90,000 − 55,000 = 35,000.
Practice
Net profit is what is left after taking off:
Revenue → gross profit (− cost of sales) → operating profit (− expenses) → net profit (− interest and tax).
The statement of financial position
- A snapshot of what the firm owns and owes on one day (the balance sheet):
- non-current assets (kept >1 year), current assets (cash within a year),
- current liabilities (debts <1 year), non-current liabilities (debts >1 year),
- equity (owners' money + retained profit).
- The two sides always balance: assets = liabilities + equity.
Practice
On a statement of financial position, assets equal liabilities plus equity.
The two sides always balance: what the firm owns is funded by what it owes plus owners' equity.
You've got it
Key idea
- income statement: revenue → gross → operating → net profit
- gross profit = revenue − cost of sales
- balance sheet balances: assets = liabilities + equity