Crash Course in Accounting and Financial Statement Analysis, Second Edition

Summary

The income statement is a summary of a company’s profitability over a certain period of time.

• Profitability is the difference between revenues and expenses generated by a company’s activities.

• Revenues are recognized when an economic exchange occurs, and expenses associated with a product are matched during the same period as revenue generated from that product.

• Special care must be taken to distinguish operating expenses (stemming from core activities) from nonoperating costs (arising from peripheral transactions) in arriving at a company’s net income.

• Gross profit, EBITDA, EBIT, and net income are all important indicators of a company’s operating performance. While they are very useful measures of profitability, each must be used in and applied to the analysis of a company’s financial health with a full awareness of its limitations and potential for misrepresentation.

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20. The Lemonade Stand

Exercise Q1: On January 1, 2007, you decide to enter a lemonade stand business. In order to buy all of the required equipment and supplies to get started, you estimate that you will need $50, plus an extra $100 for cushion. You open a business checking account, into ...