Chapter 5. Operating Budget—Income Statement

This chapter covers the Budgeted Statement of Income, otherwise known as the Income Statement. The Income Statement (also called the "P&L" by financial professionals) is a central component of a financial model. The ultimate output of the Income Statement is known as "net income." Net income represents the difference between a business's revenues and a business's expenses. Figure 5.1 highlights the Budgeted Statement of Income and its relative position in the Master Budget hierarchy.

STEP 6: BUDGETED STATEMENT OF INCOME

The Budgeted Statement of Income combines elements from several different schedules on which I have worked thus far for Napavale. More specifically, the Income Statement draws from the Unit Sales Budget, Headcount Budget, and the Operating Expenses Budget.

Copying the sales and cost-of-goods-sold projections for Napavale into the Income Statement worksheet is the first step in building the Budgeted Statement of Income. Figure 5.2 shows the first section of the Income Statement, highlighting the sales and cost-of-goods-sold projections in addition to the resultant gross profit projections. Remember that gross profit is calculated as sales – cost of goods sold.

As I have indicated, the proper linking of information between worksheets is essential at all stages of building a financial model, and I am going to make frequent references to alternative views of worksheets in which the values and formulas contained within each cell ...

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