1) Income Statement
This is where you can find out how well the company is doing on how much money they earned or lost.
Official definition from Investopedia: An income statement is a financial statement that measures a company’s financial performance over a specific accounting period.
Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
2) Balance Sheet
It answers the question of how much are the assets of the firm is worth. Also, how did the firm raise funds to finance these assets.
Official definition from Investopedia: A balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time.
Sales amount achieved by the firm from selling their product or service.
Official definition from Investopedia: Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise.
It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.
4) Cost of Goods Sold
The amount of money incurred in the making of the goods that is sold by the firm.
Official definition from Investopedia: Cost of goods sold (COGS) are the direct costs attributable to the production of the goods sold by a company.
This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good.
5) Net Profit
The actual profit the firm actually made after deducting all relevant expenses.
Official definition from Investopedia: Net profit is the gross profit (revenue minus the cost of goods) minus operating expenses and all other expenses, such as taxes and interest paid on debt.
The formula for net profit margin is as follows: Net profit margin = (revenue – cost of goods – operating expenses – other expenses – interest – taxes) / revenue.
It is something that provides value to the firm such as the generation of future cash flows.
Official definition from Investopedia: An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
It is a firm’s debt that originates from their daily business operations.
Official definition from Investopedia: A liability is a company’s legal debt or obligation that arises during the course of business operations.
Liabilities are settled over time through the transfer of economic benefits including money, goods or services.
Ownership interest in the firm.
Official definition from Investopedia: Equity = Assets – Liabilities
Let’s put into practice what we have just learned:
Consider Skateboard Pte Ltd, a company that sells skateboards. In the period of January 1st to March 31st, 2016, the company has sales of $100,000 and $60,000 is the cost of goods sold. To run the business, the company owns $300,000 worth of machinery and factories. They owe POSB bank $100,000 loans to be paid in 2020 at a fixed annual interest rate of 2%.
Using what you have learned from this article, fill in the blanks:
The cost of goods sold- ?
Net Profit- ?