Question

1. Explain the 3 main parts of an Income statement in detail.

2. Explain the 4 basic types of nonoperating items in detail.

Answer 1

1.The Gross Profit Section

The gross profit section shows revenues – sales of goods or services – minus the cost of goods, or how much was spent to make or buy the items sold. It does not include other expenses, but it shows whether you're pricing the products correctly or whether you may be discounting too much. Avoid considering the numbers solo, but compare changes from previous reporting periods to spot important trends. Use data here to calculate gross margins – the ratio of gross profit to net sales.

The Operating Expenses Section

Operating expenses show how much it costs to run your business, not including what you're spending to make your product. This section includes salaries, benefits, advertising, rent, utilities, depreciation and other operating costs. Some items here have a fixed price while others may be variable or seasonal. If expenses are going up more quickly than gross profits, check to see where you can cut costs or areas where you can drive more sales.

Net Earnings or the Bottom Line

Net earnings are the bottom line for the reporting period, as this category shows how much profit or loss you achieved. Compare the figure with previous periods and against your budget. If the trend is in the wrong direction, go back to line items in other sections to learn why there is a downward spiral.

2.