OBJECTIVES

 Explain the importance of an income statement

 Identify the parts of an income statement
 Prepare an income statement
 Understand how cash flow affects entrepreneurs
 Demonstrate a burn-rate calculation

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 1
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
  Income statements are prepared periodically to show how
a business is performing:
 Monthly
 Quarterly
 Annually
 Income statements differ in how they show their variable
expenses. They may appear under:
 Cost of Goods Sold
 Cost of Goods Manufactured and Sold
 Cost of Services Sold

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 2
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
 Income statements generally include these parts:
 Revenue. The money the business receives from selling
products or services.
 Cost of Goods Sold. The cost of producing the goods or
services.
 Gross Profit. Net sales minus the cost of goods sold.
 Operating Expenses. The expenses of running the business.
 Pre-Tax Profit. Gross profit minus the operating expenses.
 Net Profit (Loss). Pre-tax profit minus taxes.

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 3
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 4
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 5
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
 To prepare an income statement:
2. Determine the business's Revenue.
3. Calculate the Cost of Goods Sold.
4. Determine the Gross Profit.
5. Calculate Operating Expenses.
6. Determine the Pre-Tax Profit.
7. Determine the Net Profit or Loss.

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 6
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
 The cash flow equation is:

A cash flow statement is a financial document that records

inflows and outflows of cash when they actually occur.

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 7
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
 Five ways to avoid being caught without enough cash to
pay your bills are:
3. Collect Cash as Soon as Possible
4. Pay Bills Close to the Due Date
5. Keep Track of Your Cash
6. Lease Equipment
7. Keep Inventory to a Minimum

Cash flow is cyclical for many businesses, meaning that it

varies according to the time of year.

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 8
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.
 Use the burn rate to calculate how long a company can go
without revenue.

Entrepreneurship: Owning Your Future, 11th ed. © 2010 Pearson Higher Education, 9
Steve Mariotti Upper Saddle River, NJ 07458. • All Rights Reserved.