What does implications of profitability and net income of the company mean?
I created a multi step income statement for a company, coyote inc, and now I have to write 200-300 words about the implications of profitability and the net income of a company. I have no idea what this means? Can anyone tell me?
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important.
Profitability is measured with income and expenses. Income is money generated from the activities of the business. For example, if crops and livestock are produced and sold, income is generated. However, money coming into the business from activities like borrowing money do not create income. This is simply a cash transaction between the business and the lender to generate cash for operating the business or buying assets.
Expenses are the cost of resources used up or consumed by the activities of the business. For example, seed corn is an expense of a farm business because it is used up in the production process. Resources such as a machine whose useful life is more than one year is used up over a period of years. Repayment of a loan is not an expense, it is merely a cash transfer between the business and the lender.
Profitability is measured with an “income statement”. This is essentially a listing of income and expenses during a period of time (usually a year) for the entire business. Decision Tool Income Statement – Short Form, is used to do a simple income statement analysis. An Income Statement is traditionally used to measure profitability of the business for the past accounting period. However, a “pro forma income statement” measures projected profitability of the business for the upcoming accounting period. A budget may be used when you want to project profitability for a particular project or a portion of a business.
Net income
The best way to think about net income is in terms of profits. It’s the money left over after all the expenses of the company have been subtracted from revenues. It’s also important to understand that the calculation of net income is prescribed by a variety of accounting rules which are known as GAAP or Generally Accepted Accounting Principles.
Because companies follow the same accounting rules when reporting of net income in their financial statements, it’s easier for regulating authorities – such as the Securities and Exchange Commission – as well as investors to understand the financial health of a particular company. This standardization of reporting also allows investors to make direct comparisons between companies.
A simplified formula for calculating net income is as follows:
+ Revenues
– Expenses
= Net Income
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important.
Profitability is measured with income and expenses. Income is money generated from the activities of the business. For example, if crops and livestock are produced and sold, income is generated. However, money coming into the business from activities like borrowing money do not create income. This is simply a cash transaction between the business and the lender to generate cash for operating the business or buying assets.
Expenses are the cost of resources used up or consumed by the activities of the business. For example, seed corn is an expense of a farm business because it is used up in the production process. Resources such as a machine whose useful life is more than one year is used up over a period of years. Repayment of a loan is not an expense, it is merely a cash transfer between the business and the lender.
Profitability is measured with an “income statement”. This is essentially a listing of income and expenses during a period of time (usually a year) for the entire business. Decision Tool Income Statement – Short Form, is used to do a simple income statement analysis. An Income Statement is traditionally used to measure profitability of the business for the past accounting period. However, a “pro forma income statement” measures projected profitability of the business for the upcoming accounting period. A budget may be used when you want to project profitability for a particular project or a portion of a business.
Net income
The best way to think about net income is in terms of profits. It’s the money left over after all the expenses of the company have been subtracted from revenues. It’s also important to understand that the calculation of net income is prescribed by a variety of accounting rules which are known as GAAP or Generally Accepted Accounting Principles.
Because companies follow the same accounting rules when reporting of net income in their financial statements, it’s easier for regulating authorities – such as the Securities and Exchange Commission – as well as investors to understand the financial health of a particular company. This standardization of reporting also allows investors to make direct comparisons between companies.
A simplified formula for calculating net income is as follows:
+ Revenues
– Expenses
= Net Income
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