The Income Statement Explained
In the video, you see two years of data for Imaginary Ltd. The company had the same sales and same operating profit in both years. However, its performance really wasn’t the same from one year to the next. How do the details of the income statement help you see this? What key performance measures were you able to glean from the income statement?
Though the key elements of the income statement can be summarized as simply all the firm’s revenues and expenses, how would you describe the elements of the income statement in more detail? Assume you were consulting for a friend who owns a small dairy farm. What items would you expect to see on their income statement? Make a list and be as detailed as you can. Curious if your list is accurate? Consider doing an online search to find an income statement for a dairy farm or similar business. Compare its income statement to your list to see if you had the right idea.
How the Balance Sheet Works
In the video, before the example started, a fair amount of discussion time was devoted to the accounting equation, double-entry accounting, and the past versus the present data. How do all of these concepts tie together in the balance sheet and the type of data we can hope to glean from a balance sheet?
Three key account types are represented on the balance sheet: assets, liabilities, and equity. Much like the income statement, however, there is a great deal more detail to a balance sheet than simply these three figures. What additional accounts and detail can you find on the balance sheet? If you were to look up the balance sheet for the company that sells your favorite thing (e.g., coffee, your laptop, your phone, candy), what types of accounts do you think you will find on its balance sheet? Consider doing an online search for the company’s balance sheet to see if your guess is correct.