CPAP.com Lunch and Learn - Carolyn Goodman - Overview of Financial Statements part 1

1. Lunch & LearnVI:
Financial Statements: Part 1
Income Statement
1
Carolyn Goodman
CPAP.com

2. LemonADE Stand, Inc.
2

3. Types of Financial StMTs
Income Statement
Balance Sheet
Statement of Cash Flows
Statement of Retained Earnings
3

4. Question
What is the difference between:
Revenue
Gross Margin
Net Margin
4

5. Income Statement
“A financial statement that measures a
company’s financial performance over a specific
accounting period.” - investopedia
Also known as a “profit & loss statement” (P&L)
Revenue - Expenses = Net Income
5

6. Income Statement
Revenue (Sales, Income) $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
Lemonade Stand, Inc. May 2013 Income Statement
6

7. Income Statement
Revenue = Sales
“Total income produced by a given source” -
Merriam-Webster
7

8. INcome Statement
Revenue/Sales:
Sell each glass of lemonade for 50¢
100 glasses sold
100 * 50¢ = $50
8

9. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
9

10. INcome Statement
Cost of Goods Sold (COGS) (Product Costs):
Each glass of lemonade costs 20¢ per glass of
lemonade (cups, lemons, sugar)
100 glasses sold
100 * 20¢ = $20
10

11. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
11

12. INcome Statement
Gross Profit (Gross Margin) - the amount of
income you have left after product costs to cover
remaining expenses
12

13. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
13

14. INcome Statement
Operating Expenses (Costs):
Table $10
Chairs $4
Decorations $6
Pitcher $2
Employee (Sister) $3
Total Operating Expenses $25
14

15. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
15

16. INcome Statement
Net Income (Net Margin, Net Profit) -
Company’s total earnings (profit)
Net Income does not necessarily mean your
ending cash balance
Income Statement is not a Cash Flow Statement
16

17. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Net Income (Net Margin, Net
Profit)
$5
17

18. INcome Statement
“The only things certain in life are death &
taxes”
- Benjamin Franklin
18

19. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Earnings before taxes (EBT) $5
Tax Expense ($1.75)
Net Income (Net Margin, Net Profit) $3.25
19

20. INcome Statement
Earnings before taxes (EBT) - Just as it says, the
amount of income after product costs and
operating expenses, before taxes are factored
20

21. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Earnings before taxes (EBT) $5
Tax Expense ($1.75)
Net Income (Net Margin, Net Profit) $3.25
21

22. INcome Statement
Tax Expense:
Assuming:
a 35% income tax rate
no sales tax
EBT * tax rate = tax expense
$5 * 0.35 = $1.75
22

23. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Earnings before taxes (EBT) $5
Tax Expense ($1.75)
Net Income (Net Margin, Net Profit) $3.25
23

24. INcome Statement
Calculating ratio margins - “everything in
relation to revenue”
24

25. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Earnings before taxes (EBT) $5
Tax Expense ($1.75)
Net Income (Net Margin, Net
Profit)
$3.25
Gross Margin % =
Gross Profit / Revenue
or:
(Revenue - COGS) /
Revenue
$30/$50 = 60%
or
($50-$20) / $50 = 60%
25

26. Income Statement
Sales Revenue $50
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30
Operating Expenses ($25)
Earnings before taxes (EBT) $5
Tax Expense ($1.75)
Net Income (Net Margin, Net
Profit)
$3.25
Profit Margin % =
Net Income / Revenue
or:
(Revenue - COGS -
Expenses) / Revenue
$3.25/$50 = 6.5%
or
($50-$20-$25-$1.75) / $50
= 6.5%
26

27. Income Statement
Sales Revenue $50 100%
Cost of Goods Sold (COGS) ($20)
Gross Profit (Gross Margin) $30 60%
Operating Expenses ($25)
Earnings before taxes (EBT) $5 10%
Tax Expense ($1.75)
Net Income (Net Margin, Net
Profit)
$3.25 6.5%
27

28. INcome Statement
Lemonade Stand, Inc. decides to expand for June to 3 locations:
Increases prices each lemonade glass to 75¢ each
Cost per glass of lemonade 18¢
Cost per table $10 (3 tables) = $30
Cost per chair $2 (3 chairs) = $6
Cost of decorations $15
Cost per pitcher $1 (3 pitchers) = $3
Employees (Sister & Friend) $30
35% tax rate
Sold 195 glasses of lemonade
28

29. Income Statement
Sales Revenue
Net Income (Net Margin, Net
Profit)
29

30. Income Statement
Sales Revenue 100%
Cost of Goods Sold (COGS)
Gross Profit (Gross Margin)
Operating Expenses
Earnings before taxes (EBT)
Tax Expense
Net Income (Net Margin, Net
Profit)
30

31. Income Statement
Sales Revenue $146.25 100%
Cost of Goods Sold (COGS) ($35.10)
Gross Profit (Gross Margin) $111.15 76%
Operating Expenses ($84.00)
Earnings before taxes (EBT) $27.15 19%
Tax Expense ($9.50)
Net Income (Net Margin, Net
Profit)
$17.65 12.1%
31

32. Question
What is the difference between:
Revenue
Gross Margin
Net Margin
32

33. INcome Statement
But what if Lemonade Stand, Inc. took out a loan
of $100 from Parents, Inc. that charged a 10%
interest rate for the expansion?
33

34. Income Statement
Sales Revenue $146.25 100%
Cost of Goods Sold (COGS) ($35.10)
Gross Profit (Gross Margin) $111.15 76%
Operating Expenses ($84.00)
Earnings before interest & taxes (EBIT) $27.15 19%
Interest Expense ($10)
Earnings before taxes (EBT) $17.15 12%
Tax Expense ($6.00)
Net Income (Net Margin, Net Profit) $11.15 7.6%
34

35. INcome Statement
How much cash does Lemonade Stand, Inc.
have?
More on that next time.....
35