Assignment 1: Application of Financial Statement - Essay Example

The top line of the income statement shows the revenues, while the last line of the statement illustrates the net income. The income statement can be used by everyday persons to evaluate potential investment in the stock market. Companies that have good income statement results are firms that are attractive investments. The net income that a company generates is either paid back to the stockholders in dividends or the money goes into retained earnings. Through the passage of time companies that achieve positive net earnings results accumulate wealth and as a consequence the prices of their common stock go up in value.

The net income can be used by everyday people as a mechanism to evaluate the profitability of a person’s projects. For example a person might have a garage sale at their home. The homeowner can utilize basic accounting knowledge to keep track of expenses and revenues. This numbers can be plug-in into the income statement format to determine the net income of the garage sale project. Business managers can benefit a lot from the use of the income statement because this accounting tool serves the purpose of measuring how profitable a firm, project, or business venture is.

The income statement serves as a source of raw data that can be used by managers to perform finance analytics such as ratio analysis. The gross profit margin ratio and the net margin ratio can be calculated using information retrieved from the income statement of a corporation. The gross margin ratio is calculated dividing (revenues – cost of goods sold) / revenues. The net margin can be calculated dividing net income / total revenues. A manager can use the gross margin percentage to determine how profitable different product lines are.

Products that have low gross margins should be discontinued. The bottom part of the income statement has a list of the different operating costs that a company incurs during an accounting period. The typical size of an accounting period is one year. A manager can perform trend analysis to determine the difference in costs behavior between the different categories of expenses to determine the changes in costs between years. Based on that analysis a manager can implement changes in order to lower the operating cost of a company.

Managers have to manage the variable and fixed costs of a company. For example if the insurance costs are too high based on the evidence from the income statement the manager can switch companies in order to reduce that category of expenses. The human resource manager of a company can utilize the income statement in order to make analysis about the labor needs of an enterprise. The income statement illustrates how much a company is spending on maintenance expenses. The human resource manager can compare the cost of paying for maintenance vs.

the cost of outsourcing the maintenance work to an outside company. If the analysis determines that is cheaper to pay an outside firm the human resource manager has to make the recommendation to the general manager to terminate the employment of the maintenance workers in order to hire an outside cleaning firm. The human resource manager can also utilize the income statement to evaluate the direct labor and administrative expenses of a company. A good comparison base that can determine if the administrative expenses of the company are adequate or excessive is to compare how much your company spent on administrative ex