Revenue - Expense = Net Income for a period of time **Period in Time**
Increase in NET assets ( OE) resulting from operations of the business
Accrual Basis of Accounting
Revenues are recorded when service is EARNED or goods are PROVIDED. Expenses are recorded when resources are UTILIZED to earn revenue. Considered GAAP method
Cash Basis of Accounting
Revenues are recorded when cash is RECEIVED. Expenses are recorded when cash is PAID. This basis of accounting ignores performance and utilization Not considered GAAP
Substance of the Income Statement
Time Frame: Reports a period of time Content: Revenue - Expense = net income Use/ Objection : Used as a tool to measure, evaluate performance of management
Gross Margin Ratio
Gross Margin / Net Sales = __% Relationship of gross margin to sales. Convert percent to decimal 0.xx cents of each $1 of sale is gross profit.
Return on Sales Ratio
Net Income / Net Sales = __% Relationship of Net Income From Operations to Net Sales Convert percent to decimal Each $1 of sales generates 0.xx cents of profit
Earnings Per Share (EPS)
Net Income / # shares of stock outstanding = $____ per share Ratio allows relative comparison btw companies of the earning power on a per share basis.
Return on Assets Ratio (ROA)
Net Income / Total Assets =__% Looks at 2 important profi elements, Earning and investment in assets Measures mangt success in using the assets to earn income for business. **higher percentage the better.**
Return on Equity Ratio (ROE) : Links Income Stmt to Balance Sheet
Net Income / Total Stockholder's Equity =___% Convert % into decimal = cents Generated ___cents of profit for every $1 of stockholders equity. measure of how well mangt. produces income w/ amt of investment the stockholders have made in the company.
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