ABC Building an Income Statement pt 3 - YouTube

Welcome back to our intermediate financial accounting class. This section is all about the income statement. In the first two segments

we talked about what the income statement is, why it's important, how we structured it, and then in our last segment we started actually building

an income statement, and here's the work that we started doing.

So you can see we've got a good heading, so that our income statement can be in good form, and then we've done the first

step in our multi-step income statement,

which is our net sales, minus our cost of goods sold, to get us a gross profit number. Now that we've got gross profit,

we're going to move on to our next section, and that's our operating activities. And that's going to be this piece

right here.

We're gonna break this down into two chunks, selling expenses, and administrative expenses. A lot of companies

do not they just have one S n' A expense section where they list everything together, or in a big company,

they may just list S n' A expenses, and that's all they provide.

So it depends on the company, and the information they want to give to their investors,

but you have to provide some information about your selling and administrative expenses. In this case, we're gonna start with our selling

expenses, and you can see we're going to end up having one, two, three,

four, five of those, and

that's gonna let us get a total

selling expense.

Then we're going to put in our administrative

expenses, and we're gonna have several of those one, two, three, four, five, six, seven

administrative expenses. And we're going to label this total administrative

expenses. The reason I put all of this in, is because we're going to go through our list of expenses one by one, and we're

gonna put them wherever we think they go. So let's go ahead then, to our raw data tab. Let's start up here,

let's see: accounts payable not an expense, depreciation, not an expense. Our first expense is advertising expense.

Advertising expense, if we think selling verses administrative, advertising would probably be a selling expense

because it's

advertising, so it's part of selling my goods. So I'm gonna put it up here,

and again, you're welcome to link this, I'm gonna type it in, but you don't have to. All right,

let's go see if we can find our next one

Allowance for Bad Debts, ah! There's bad debt expense.

Bad debt expense

is the cost of people ripping us off: we sell to them on credit, and then they rip us off, and never pay us.

So again, because it's about our, uh,

customers, it's probably also a selling expense. So we're gonna put that

right here. Bad debt

expense. And that was 9,750. Now, you'll notice here, I haven't put these numbers in is negative.

It's not common to see them listed as negatives. Instead,

you're taking the total sales, minus a total expense.

You don't really see negatives until you start getting into the gain and loss section,

which we'll talk about later on. Okay, that's our bad debt expense.

Let's see, what's next.

Building? No, I'm just looking for expense. Ah! There's depreciation. Now, depreciation depends. A lot of times,

depreciation expense is purely administrative,

it can also be a little bit of both, but more than likely you depreciate your office building, and

computer systems etc. So chances are, this is an administrative expense.

Okay, let's see. Dividends. Not an expense EVER. Just thought I emphasize that, in case you forgot.

Oh, there you go: executive salaries. Executive salaries expense,

probably administrative, sales for salaries or wages that will be selling expense. So executive salaries,

expense 87,500.

Let's see, expansion fund...

Income tax expense, now, we're gonna hold off on income tax expense. Most companies list income tax expense last.

It's the last thing you see before net income. It's actually the final step in the calculation,

so hold that thought. We'll come back to that one. Let's see, insurance expense.

Let's go and put that in. When in doubt, we kind of default to administrative,

so if it's not obviously selling, then chances are it's more general, and goes in administrative. And

insurance is part of that group.

So that kind of defaults there,

although, again, you can have insurance on your sales force.

Sometimes, this categorization,

selling versus administrative, totally depends on the company. So we can go through some general examples,

this usually goes here, this usually goes there, but it's gonna depend on your company, and how the company's structured. That's insurance expenses,

see, next one,

interest expense.

Again interest expense typically not included with selling an administrative, because it's an expense on debt,

which is not

really, definitely not selling, we can kind of put it as much as

administrative, but usually it's broken out, just because investors look for that number, and we don't want it to get lost in that

administrative section.

So, can you put it in administrative? You can,

but we're not going to. Again, just so we're showing you an example of what's calm. Alright, let's see, inventory, land, loan payable,

Ah! Miscellaneous administrative expenses.

Definitely admin. And miscellaneous selling expenses. Definitely selling. I'm gonna go ahead and do both of those at once,

so miscellaneous

-whoops-

750. And we have miscellaneous

selling expense up here.

9750.

I think I put that number in wrong. Bad debt expense. I did!

27,500. Everyone was probably very confused. I

apologize.

Hopefully...hopefully now it looks better to you. I...

yeah. My bad. I was going through my solution too quickly, and typing in the wrong number. Sorry about that.

Let's see, let's go up here to the top. Office supplies expense. Office expense's probably administrative,

so there's that number.

Patents, prepaid insurance, prepaid rent. Ah, there's some rent expense.

Again, rent expense could go either way. You'll also sometimes see it broken out, but more commonly it ends up in administrative.

So that's where we're gonna put it.

Let's see, ah, selling commissions expense. This is

part of the salary that we would pay to our sales force. So that's gonna be a selling expense.

Let's see. Next,

shipping expense. Now we talked about this already, but you remember shipping expense, as opposed to

shipping charges. Shipping charges is our Freight in, shipping expenses is

us selling, or us paying to send to our customers. So that becomes a selling expense.

And it looks like we're missing just one more. Down here I have one blank line,

so obviously I'm missing one. All right, utilities expense: 15,000.

And there we go, so these are all of our

selling and administrative expenses, also known as

operating activities. Now that we've got all of our operating and selling activities,

we're ready to do our next step. In order to do that, I first need to add up and get a total

S n' A, total selling and administrative number. So, sometimes you'll see this as a separate line, total selling and administrative expenses.

I'm going to just break it out into this other column and take the 191,

plus the 161,250. And there's my total S n' A expense

right here. And down here, you can see that I've already,

gonna press f2, f2 will show you your equations, if you're not familiar with that cheat code.

So you can see that this takes the 710, that when gross profit, minus total S n' A, and gives us

income from

operations.

Gross profit tells us what we're making on each sale, what we're keeping from each sale.

Income from operations takes out our day to day

stuff. And now we're gonna do kind of the abnormal line items, things that are different. They're not part of our day-to-day,

running the business, and we're gonna put our gains and losses, and then we'll put in our taxes as well.

So you will see gains and losses here, you'll also see anything

that's abnormal, that doesn't fit anywhere else.

And that's what this company has got.

Did you notice a couple things that we skipped? A couple of them we mentioned for sure, one we didn't, one

was this interest expense, and one

was this rent revenue. The third was income tax expense, but we're gonna leave income tax expense for the time being because again,

it's that very last step, taking out taxes. So by tradition, again, you don't have to, but by tradition the gains or

abnormal revenues, they go first, so we're gonna put in the rent revenue first, and then we'll put in the interest expense.

So rent revenue

6,250, and interest expense, and this time I am gonna use a negative,

because I've got revenues and expenses in one section. Before, I had just revenues, or just expenses.

So again, we're gonna add these up,

so a total adjustment of

$6,500 and

this

is my income from continuing operations

before

taxes. So, you can probably guess what the next line is right? It's our tax line. So income tax

expense. You may not remember, but this line was

87,852.

All right, if you're caught up and ready to go, and you have these numbers,

I'm gonna go back and mark that I've used now these three abnormal

expenses. They're just not part of normal operations. That's the only thing weird about them and

now as I come back, I can do my last line and

that's net income. And you can see I've already got it marked with that double underline that shows what's really going on:

that this is my final number, my key number.

We're going to go ahead and stop there. When we come back,

we're going to talk about some other options for presenting an income statement.

I'll see you then.