BUSINESS
MANAGEMENT
Unit 4 Income Statements
Business Analysis
Risk
Solvency
Feasibility
Liquidity
Repayment
Capacity
Statement of Cash flows
Balance Sheet
Statement
of
Owners’s
Equity
Income Statement
Profitability
Financial Efficiency
Income Statement
Definition: A summary
of income and expenses
for a given period of
time.
Uses of the Income Statement
 Reporting income and
expenses on tax returns
 Required on loan applications
 Financial analysis of business
 Explain changes in Owner’s Equity
Reporting Income and Expenses
Cash Method
Accrual Method
Cash Method
 Income must be reported in the
year the cash, or its equivalent
is received.
 Deductions for expenses are
made in the year that the cash
is paid out.
Cash method- Advantages
 Flexibility- choose when to take
income and deduct expenses.
 More favorable capital gains tax
treatment than accrual method.
 If business shows a profit, cash is
available to pay the income tax.
Cash Method- Disadvantages
 Expenses are not deductible until
cash is paid.
 Inventory adjustments must be
made to compute an income
statement and analysis
information.
 Income reported is more erratic.
Cash Transactions
 Cash Revenue
 Cash Expenses-summary and
coded
 Depreciation
 Gain or Loss on Sales of Capital
Assets- Capital Gains/Losses
Cash Income Statement
 Do Assignment #1---Cash Income
Statement for GYFS
 Information on Website
 Create a new page in your Excel
spreadsheet assignment file.
Accrual Method
 Inventories must be used to
determine gross income. Sales
are treated as income when the
price of the item is recoverable.
 Expenses are deductible when
payable.
Accrual Method-Advantages
 Levels out peaks and valleys of
income without year-end
manipulations.
 Easier to determine net income
and analyze strong and weak
points of the business from year to
year than with the cash method.
Accrual Method-Disadvantages
 very detailed and complex records are
required.
 Inventory must be valued by an approved
IRS method.
 In some years profit may only appear on
paper, and money may have to be
borrowed to pay income tax.
 Difficult to determine actual cash position
of the business.
Variable Costs
 Costs that vary
with production
levels
Fixed Costs
 Costs that
remain
constant
with changes
in production
Analysis
 Operating ratio=
 Fixed ratio=
 Gross ratio=