Income Statement for Quarter 1:
Revenues-
Sales: $100,000
Service Fees: $10,000
Total Revenue: $110,000
Expenses-
Cost of Goods Sold: $40,000
Selling and Admin expenses: $20,000
Interest expenses: $2,000
Total Expenses: $62,000
Net Income: $48,000
Income Statement for Quarter 2:
Revenues-
Sales: $120,000
Service Fees: $5,000
Total Revenue: $125,000
Expenses-
Cost of Goods Sold: $50,000
Selling and Admin expenses: $20,000
Interest expenses: $2,000
Total Expenses: $72,000
Net Income: $53,000
Some differences between the two income statements include the higher total revenue and net income in Quarter 2 compared to Quarter 1. This difference is mainly due to the increased sales revenue in Quarter 2. The increase in sales could be attributed to a new marketing campaign, a new product launch, or an improvement in sales strategies.
The relationship between cost and profit is evident in the Cost of Goods Sold and the Net Income. The Cost of Goods Sold represents the direct costs of producing goods or delivering services, and a higher cost of goods sold can lead to lower profit margins. In these income statements, Quarter 2 has higher cost of goods sold, but also higher sales revenue, resulting in a higher net income compared to Quarter 1.
To improve the cost and profit ratio, the business could focus on reducing the cost of goods sold by optimizing supply chain operations, negotiating better deals with suppliers, or improving production efficiency. Additionally, increasing sales revenue through targeted marketing efforts, expanding customer base, or introducing new products/services can also help improve the profit margins. Ultimately, finding the balance between lowering costs and increasing revenue is crucial for maximizing profitability in the business.
You have been developing a business for this course, so it is time to work on the accounting part of the business. Create two income statements (like this example shown in Lesson 3)—one for each of the first two quarters of the business.
(XYZ Corporation
Quarter 1 Report
(January 1-March 31, 2019)
Revenues-
Sales: $112,520
Investment: $1,500
Total Revenue: $113,720
Expenses-
Cost of Goods Sold: $63,840
Selling and Admin expenses: $23,975
Interest expenses: $375
Total Expenses: $88,190
Net Income: $25,530 )
The type of expenses will depend on the nature of your business, but assume the following conditions are true:
1. The business has some debt, and therefore interest payments
2. There is a dramatic change in sales from one quarter to the other (you can choose how)
3. The fixed expenses are the same for both quarters
4. The business has more than one type of revenue
After you have created the income statements, explain some of the differences between them and possible reasons for these differences. Examine the relationships between cost and profit. How could the business improve this ratio?
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