11.Acc 101 - Income statement

May 01, 2026 03:12 · 7:33 · English · Whisper Turbo · 1 speakers
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0:12
S… Speaker 1 (11.Acc 101 - Income statement)
Accountants prepare three different financial statements or financial report cards. The most popular report card to business owners and the one they love to look at is called an income statement. Sometimes it's called a P&L or a profit and loss or a statement of operations. They're all the same thing.
0:33
S… Speaker 1 (11.Acc 101 - Income statement)
When business owners receive their financial report cards, which candidly is not very consistently, and when they bother to peek at them, which is even rarer, they always look at the income statement first. And the first place they look on the income statement is the lower right-hand corner, the bottom line, net income, earnings, profits. If it's a good number, they have a drink. If it's a bad number, they have two drinks.
1:02
S… Speaker 1 (11.Acc 101 - Income statement)
The thinking and drinking seems to be predicated on the idea that the earnings a business produces is the most important number on their financial report card. This is dead wrong, and it helps explain why so many businesses struggle financially and why so many business owners are so frustrated. The net income of a business is simply the result of some simple math.
1:28
S… Speaker 1 (11.Acc 101 - Income statement)
Why in the world would I get excited or depressed about the number four? Maybe the sales were $1,000 and expenses were $996. Maybe the business's sales were $15 and expenses were $11. They both have the exact same net income of four. What's critical is not the number, but how they got there.
1:53
S… Speaker 1 (11.Acc 101 - Income statement)
Earnings are a result of how efficient management is at controlling the expenses on a given amount of revenue. Revenue is a result of how effective management is at utilizing or acquiring their assets. An income statement records the revenue activities of a business along with the expenses and costs incurred to produce this revenue.
2:21
S… Speaker 1 (11.Acc 101 - Income statement)
For these reports to be meaningful, the revenue achieved during a certain time period is matched to the cost and expenses which were incurred to produce that revenue, which will also be for that exact same specific time period.
2:39
S… Speaker 1 (11.Acc 101 - Income statement)
So if revenue was $10,000 in the month of January, the income statement would show the expenses and costs required to produce that $10,000 of revenue in January. For the income statement to be meaningful, we want the revenue and the cost associated with the production of that revenue to all show up in the same time period.
3:03
S… Speaker 1 (11.Acc 101 - Income statement)
measuring doesn't work too well if you're trying to figure out what you ate 16 years ago that's causing you to be five pounds overweight today. The same is true for an income statement. We can't have costs from two months ago polluting this month's income statement. Costs from two months ago were incurred to produce the revenue from two months ago and have absolutely nothing to do with this month's revenue.
3:31
S… Speaker 1 (11.Acc 101 - Income statement)
We must get the revenue and the cost of producing and servicing that revenue grouped into the same month. If the sales exceed the cost, then there's a profit or earnings or net income. If costs exceed revenue, then there's a loss. Either way, whether it's a profit or a loss, it's commonly referred to as the bottom line.
3:58
S… Speaker 1 (11.Acc 101 - Income statement)
An income statement is not like a balance sheet. It's like a movie. It's not a snapshot. An income statement is a movie that tells the story of all the revenue and all the associated cost of producing that revenue during a month or a quarter or a year. Here's the dirty little secret. Just because your earnings have a dollar sign in front of them does not mean that they're cash.
4:28
S… Speaker 1 (11.Acc 101 - Income statement)
Profits have absolutely nothing to do with cash. Profits are a theory. Cash is a fact. Profits are the theory of whether or not your revenues in your business exceeded the expenses. If they did, then you have a positive profit or a net income or a bottom line. And if they didn't, you have a loss.
4:51
S… Speaker 1 (11.Acc 101 - Income statement)
The reason profits are a theory is because your business probably has some accounts receivable, which is money owed to you by your customers who gave you an IOU instead of cash. These sales have been recorded on your income statement as revenue in the month in which the sale was made, even though you didn't receive the cash. This, of course, assumes you're using accrual accounting.
5:19
S… Speaker 1 (11.Acc 101 - Income statement)
Watch the coaching tutorial video entitled Cash vs. Accrual Accounting, which one is right for you for more information on this critical subject. Get this one wrong and the measuring and optics I've been talking about become meaningless. It is just as likely that you charged some expenses to a credit card or gave one of your vendors an IOU. This is called an account payable.
5:49
S… Speaker 1 (11.Acc 101 - Income statement)
these expenses are still expenses in the month in which they were incurred, even though you didn't use your cash. In other words, an income statement is designed to tell you the theory of your revenue, your expenses, and your profits, but it is not designed to tell you whether or not these profits have been converted into cash. That's the job of the statement of cash flow. IBM's income statement is a theory.
6:18
S… Speaker 1 (11.Acc 101 - Income statement)
Google's income statement is a theory. Apple's income statement is a theory. And your company's income statement is a theory too. When business owners hear me talk about this and the income statement, they assume that since an income statement is a theory, that I'm somehow minimizing its importance. Nothing could be further from the truth.
6:42
S… Speaker 1 (11.Acc 101 - Income statement)
An income statement might be a theory, but it is a very important theory and is not to be minimized in any way. We need to know if our business is profitable because this means our revenue is exceeding our expenses and we have a sustainable business model. If a business perpetually loses money and has losses instead of profits, this is a broken business. So an income statement is vitally important.
7:11
S… Speaker 1 (11.Acc 101 - Income statement)
It's just not intended to track cash. Equally important is tracking how productively management is at converting profits into cash. So make sure you watch the Accounting 101 coaching video called The Cash Flow Statement.

This transcript was generated by AI (automatic speech recognition). May contain errors — verify against the original audio for critical use. AI policy

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