4.1. Presenting a Typical Income Statement

At the risk of oversimplification, I would say that businesses make profit three basic ways:

  • Selling products (with allied services) and controlling the cost of the products sold and other operating costs

  • Selling services and controlling the cost of providing the services and other operating costs

  • Investing in assets that generate investment income and market value gains and controlling operating costs

Obviously, this list isn't exhaustive, but it captures a large slice of business activity. In this chapter, I concentrate on the first category of activity: selling products. Products range from automobiles to computers to food to clothes to jewelry. The customers of a business may be the final consumers in the economic chain, or a business may sell to other businesses.

Figure 4-1 presents a typical profit report for a product-oriented business; this report, called the income statement, would be sent to its outside owners and lenders. The report could just as easily be called the net income statement because the bottom-line profit term preferred by accountants is net income, but the word net is dropped off the title. Alternative titles for the external profit report include earnings statement, operating statement, statement of operating results, and statement of earnings. (Note that profit reports distributed to managers inside a business are usually called P&L [profit and loss] statements, but this moniker is not used in external financial ...

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