1. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Mariotti: Entrepreneurship Entrepreneurship Chapter 7 Using an Income Statement to Guide a Business

2. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Entrepreneurs Use 3 Financial Statements 1.Income statement 2.Cash flow statement 3.Balance sheet Data for the financial statements comes from the accounting journal. The statements show the health of the business at a glance.

3. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Income Statement: Scorecard for the Entrepreneur Prepared monthly and at end of fiscal year Also called “profit and loss statement” Shows whether or not business is making a profit Profit is entrepreneur’s reward for adding value to scarce resources

4. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship 8 Parts of the Income Statement 1.Revenue 2.Cost of Goods Sold (COGS) 3.Other Variable Costs 4.Contribution Margin (a.k.a. Gross Profit) 5.Fixed Operating Costs (USAIIRD) 6.Pre-Tax Profit 7.Taxes 8.Net Profit/(Loss)

5. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Income Statement

6. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship A Simple Income Statement

7. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Return on Investment (ROI) You “invest” time, energy or money into something because you expect a “return” of money or satisfaction. Return on investment (ROI) measures return as a percentage of the original investment. Net Profit/Investment X 100 = ROI% What you made over what you paid, times 100.

8. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship To Calculate ROI for a Business, You Need 3 Things: 1.Net Profit: found on bottom line of the income statement. 2.Investment: all money used to start the business (Start-Up Investment) plus additional money invested later. 3.The period of time for which you are calculating ROI (typically one month or one year).

9. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Income Statement for a More Complex Business

10. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Use Financial Ratios to Analyze an Income Statement Express each line of the income statement as a percentage by dividing sales into it and multiplying by 100. This makes it easy to see how each item is affecting the business’s profit. Net Income/Sales is called Return On Sales (ROS) Fixed Operating Costs/Sales is called Operating Ratio INSERT FIG FROM BOTTOM OF PG 189

11. © 2007 Pearson Education. Upper Saddle River, NJ, 07458. All Rights Reserved.Marriotti: Entrepreneurship Same Size Analysis: Used to Compare Income Statements