Dq response due tonight

User Generated


Business Finance


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 wrote


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.



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 .



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                                        


User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Great! 10/10 would recommend using Studypool to help you study.


Similar Content

Related Tags