My response to the class member needs to be 200 words with at least one reference with citations along with the web site/sites you used. I need to respond back to this class mate here is what they wroteAbstract Financial statements are very important for a business to complete and provide a plethora of information which will aid in the business’s success. One of these documents is called an income statement. According to Ehrhardt and Bringham, the income statement “Summarizes the firm’s revenues and expenses over an accounting period. Net sales are shown at the top of each statement, after which various costs, including income taxes, are subtracted to obtain the net income available to common stockholders. The bottom of the statement reports earnings and dividends per share” (Ehrhardt and Bringham, 52). The Income Statement Income statements can be done at any time, but are usually done annually, quarterly or monthly and are a summary of that particular period of time (Ehrhardt and Bringham, 52). The overall goal of an income statement is to show the gain or loss of money during that time while considering the revenues and the expenses during that time period (Beginner’s Guide to Financial Statements, 2007). This is done by first recording gross revenue, or the amount of money received by the company before any expenses are taken into consideration (Beginner’s Guide to Financial Statements, 2007). This number is not how much money the company made necessarily, because there are a lot more steps that need to be done and consider how much money the company spent in order to make this amount. Next, to get the net revenue, discounts and returns are listed, which is money that is subtracted from the gross revenue because it is recorded income that is not expected to be received (Beginner’s Guide to Financial Statements, 2007). The next step is to record the cost of goods sold, which is what the company paid to produce the products or services it is selling (Beginner’s Guide to Financial Statements, 2007). When this amount is subtracted from the net revenue it provides the gross profit, which is the profit before other expenses are considered (Beginner’s Guide to Financial Statements, 2007). The expenses that are next recorded are operating expenses, and include any monies paid out to be able to run the company and produce products or services (Beginner’s Guide to Financial Statements, 2007). These are written each on their own line and include salaries of all employees, marketing expenses, depreciation (the cost of the wear and tear on physical assets like machinery and tools, dispersed throughout the lifetime of that asset) and expenses geared toward researching and developing new products (Beginner’s Guide to Financial Statements, 2007). This total is called the operating profit margin or income from operations (Beginner’s Guide to Financial Statements, 2007). After this is calculated, interest is recorded, include interest earned and interest paid on all financial accounts, and the numbers are added and subtracted (Beginner’s Guide to Financial Statements, 2007). Lastly, income taxes are recorded and deducted to provide the final result, the net losses or net profit of the company during that specific time period (Beginner’s Guide to Financial Statements, 2007). At this point the company can find out what their earnings per share are. Earnings per share show what each shareholder would receive if the company dispersed all of their net profit to its shareholders (Beginner’s Guide to Financial Statements, 2007). Companies usually do not disperse 100% of the profit, only a portion of it because they invest some of the money back into the company (Beginner’s Guide to Financial Statements, 2007). If they were to disperse all of it, this is done by taking the net profit and dividing it by the number of outstanding shares the company has (Beginner’s Guide to Financial Statements, 2007). If they decide to take out a portion to invest back into the company, the remaining balance would be divided the same way. The answer of that calculation is what each share of the company is worth, and investors would be paid that amount for each share of the company that they own (Beginner’s Guide to Financial Statements, 2007). So if a person owned 20 shares of stock, and each stock was worth $42.00, the person would get $840.00 ($42.00 x 20 = $840). It is important to have accurate financial statements including the income statement. This not only will tell the company how much profit they have made, but also allow them to see trends in numbers. “Three of the big profitability indicators you’ll want to look at our gross profit margin, operating profit margin and net profit margin. Again, you’ll want to look at all of them over a period of time to see how they’re trending and figure out why they’re going in a certain direction” (Quinn, 2010). Seeing trends is beneficial because the management team can discover when peak periods are and if costs need to be cut in certain areas. Errors in the financial statements, whether they are accidental or fraudulent can cause a lot of damage. If the figures on the income statement are invalid, it can cause the company to appear more or less successful than they actually are. If they believe they have a certain amount of profit to invest in the business, but that amount is actually significantly less, the company could owe a lot of money that it does not have. “Financial analysts, accountants and lenders use the income your company generates to determine its earnings capacity for future periods. An incorrect income statement also throws off profitability ratios such as operating margin and profit margin” (Saint-Leger, n.d.). Doing financial statements such as income statements can tell a lot about a business and its future as well as what needs to be adjusted in the company. It also gives investors an idea of what the company is worth and if it would be a good investment for them. Having accurate numbers is not only extremely important for dispersing stock earning and gaining new investors, but also for predicting future sales, and making business purchases. Conclusion Income statements can be done at any time to give an idea of how the business is doing financially over a given period of time. There are multiple steps that need to be taken in order to calculate all of the figures. Expenses will be subtracted from earning in an organized and itemized manner and in a specific order. This will give all the important figures such as gross profit margin, operating profit margin, and net profit margin, which can be used to find trends in the business and predict future periods. An error in this statement can cause a lot of problems with current investors, finding new investors and with the spending accounts of the business. Every financial statement needs to be very accurate and very detailed so that errors can be avoided . References:Beginners’ Guide to Financial Statements. (2007, February 5). In U.S. Securities and Exchange Commission. Retrieved July 12, 2013, from http://www.sec.gov/investor/pubs/begfinstmtguide.htm Ehrhardt, M., Bringham, E., (2010). Corporate Finance (4th ed.) South-Western Cengage Learning. Quinn, M. (2010, July 1). How to Understand an Income Statement. In INC.. Retrieved July 12, 2013, from http://www.inc.com/guides/2010/06/howto-understand-an-income-statement.html Saint-Leger, R. (n.d.). The Effect of Miscalculating on an Income Statement. In Chron. Retrieved July 12, 2013, from http://smallbusiness.chron.com/effect-miscalculating- income-statement-50627.html
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