MSE608C

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MSE608C Engineering and Financial Cost Analysis

• The Income Statement

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The Income Statement

• Balance Sheet
• The financial condition of the company on a
  certain date (a snapshot on that date)
• What is OWNED and what is OWED
• The format is the Fundamental Accounting Equation
• Income Statement
• The financial performance of the company over a
  period of time (the accounting period)
• Changes in Revenue accounts and Expense accounts
  (profit or loss over the period)
• The format is Revenues - Expenses Profit (Loss)

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Revenues and Gross Profit

• REVENUES COGS GROSS PROFIT

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Operating Expenses

• Operating Expenses are those expenses required
  for general operation of a business
• Gross Profit Total Operating Expenses
  Operating Profit

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Other Income and Expenses

• ? Net Income ? Retained Earnings

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What are Revenues and Expenses?
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A L OE
INVESTED CAPITAL
RETAINED EARNINGS
EXPENSES
REVENUES

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Accrual vs. Cash Basis

• Accrual accounting records Revenues and Expenses
  WHEN THEY OCCUR regardless of when cash is paid.
• Revenues are recorded when goods or services are
  delivered.
• Expenses are recorded when the goods or services
  are received.
• Revenues and Expenses are better matched to the
  same accounting period.
• Cash Basis accounting records Revenues and
  Expenses WHEN CASH is exchanged.
• Cash Basis is most common in small businesses and
  our personal lives.

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Who Can Use the Cash Method?

• Although the IRS allows all businesses to use the
  accrual method of accounting, most small
  businesses can instead use the cash method for
  tax purposes. The cash method can offer more
  flexibility in tax planning because you can
  sometimes time your receipt of revenue or
  payments of expenses to shift these items from
  one tax year to another.
• However, some businesses must use the accrual
  method corporations that are not S corporations
  and partnerships that have at least one
  corporation (other than an S corporation) as a
  shareholder. There are some exceptions to these
  restrictions the cash method is available for
  farming businesses and entities (including
  corporations) with average annual gross receipts
  of less than five million dollars for all prior
  years.
• Tax shelters may never use the cash method. If
  your business has inventories, you must use the
  accrual method, at least for sales and
  merchandise purchases.

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Balance Sheet or Income Statement?
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What are the Accounting Transactions?

• You purchase 6 months of prepaid rent at 1000
  per month.
• At end of accounting period (month) you account
  for rent.
• Balance Sheet or Income Statement?

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What are the Accounting Transactions?

• You purchase 500 of supplies for your business.
• You consume 100 of supplies during the
  accounting period.
• Balance Sheet or Income Statement?

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What are the Accounting Transactions?

• You purchase a motor for 500 which you will
  eventually modify (labor only) and sell as the
  product of your business.
• You modify a motor, using 100 of labor only, and
  put it into finished goods waiting to be sold.
• You sell a modified motor for 1000.
• Balance Sheet or Income Statement?

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Assessment

• What is the primary difference between the
  Balance Sheet and the Income Statement?
• Owners Equity is comprised of what two
  components?
• What is the bottom line of the Income Statement?
• Net Income is the same as __________ ?