Income Statement

Income Statement

Income Statement

Introduction to Income Statement

The income statement is one of the major financial statements used by accountants and business owners. (The other major financial statements are the balance sheet, statement of cash flows, and the statement of stockholders' equity.) The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income. We will use income statement and profit and loss statement throughout this explanation.

The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. For example, the heading may state:

"For the Three Months Ended December 31, 2015" (The period of October 1 through December 31, 2015.)

"The Four Weeks Ended December 27, 2015" (The period of November 29 through December 27, 2015.)

"The Fiscal Year Ended June 30, 2015" (The period of July 1, 2014 through June 30, 2015.)

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For example, if a company was not able to operate profitably—the bottom line of the income statement indicates a net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company. On the other hand, a company that has operated profitably—the bottom line of the income statement indicates a net income—demonstrated its ability to use borrowed and invested funds in a successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company management, competitors, government agencies, labor unions, and others.

The format of the income statement or the profit and loss statement will vary according to the complexity of the business activities. However, most companies will have the following elements in their income statements:

A. Revenues and Gains

1. Revenues from primary activities

2. Revenues or income from secondary activities

3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses

1. Expenses involved in primary activities

2. Expenses from secondary activities

3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)

If the net amount of revenues and gains minus expenses and losses is positive, the bottom line of the profit and loss statement is labeled as net income. If the net amount (or bottom line) is negative, there is a net loss.

Note: We provide business forms for preparing income statements plus a visual tutorial and exam questions pertaining to the income statement for members of

A. Revenues and Gains

1. Revenues from primary activities are often referred to as operating revenues. The primary activities of a retailer are purchasing merchandise and selling the merchandise. The primary activities of a manufacturer are producing the products and selling them. For retailers, manufacturers, wholesalers, and distributors the revenues resulting from their primary activities are referred to as sales revenues or sales. The primary activities of a company that provides services involve acquiring expertise and selling that expertise to clients. For companies providing services, the revenues from their primary services are referred to as service revenues or fees earned. (Some people use the word income interchangeably with revenues.)

It's critical that you don't confuse revenues with receipts. Under the accrual basis of accounting, service revenues and sales revenues are shown at the top of the income statement in the period they are earned or delivered, not in the period when the cash is collected. Put simply, revenues occur when money is earned, receipts occur when cash is received.

For example, if a retailer gives customers 30 days to pay, revenues occur (and are reported) when the merchandise is sold to the buyer, not when the cash is received 30 days later. If merchandise is sold in December, the sale is reported on the December income statement. When the retailer receives the check in January for the December sale, the retailer has a January receipt—not January revenues.

Similarly, if a consulting company asks clients to pay within 30 days of receiving their service, revenues occur (and are reported) when the service is performed (earned), not 30 days later when the consulting company receives the cash from the client.

If an attorney requires a client to prepay $1,000 before beginning to research the client's case, the attorney has a receipt, but does not have revenues until some of the research is done.

If a company sells an item to a buyer who immediately pays for it with cash, the company has both a receipt and revenues for that day—it has a cash receipt because it received cash; it has sales revenues because it sold merchandise.

By knowing the difference between receipts and revenues, we make certain that revenues from a transaction are reported only once—when the primary activities have been completed (and not necessarily when the cash is collected).

Let's reinforce the distinction between revenues and receipts with a few more examples. (Keep in mind that all of the examples below assume the accrual basis of accounting.)

A company borrows $10,000 from its bank by signing a promissory note due in 90 days. The company will have a receipt of $10,000 at the time of the loan, but it does not have revenues because it did not earn the money from performing a service or from a sale of merchandise.

If a company provided a $1,000 service on January 31 and gave the customer until March 10 to pay for the service, the company's January income statement will show revenues of $1,000. When the money is actually received in March, the March income statement will not show revenues for this transaction. (In March the company will report a receipt of cash and a reduction/collection of an accounts receivable.)

A company performs a $400 service on December 31 and receives the $400 on the very same day (December 31). This company will report $400 in revenues on December 31—not because the company had a cash receipt on December 31, but because the service was performed (earned) on that day.

On December 10, a new client asks your consulting company to provide a $2,500 service in January. You are uncertain as to whether or not this client is credit worthy, so to be on the safe side you ask for an immediate partial payment of $1,000 before you agree to schedule the work for January. Although your consulting company has a receipt of $1,000 in December, it does not have revenues in December. (In December your company will record a liability of $1,000.) Your consulting company will report the $1,000 of revenues when it performs $1,000 of services in January.

2. Revenues from secondary activities are often referred to as nonoperating revenues. These are the amounts a business earns outside of purchasing and selling goods and services. For example, when a retail business earns interest on some of its idle cash, or earns rent from some vacant space, these revenues result from an activity outside of buying and selling merchandise. As a result the revenues are reported on the income statement separate from its primary activity of sales or service revenues.

As is true with operating revenues, nonoperating revenues are reported on the profit and loss statement during the period when they are earned, not when the cash is collected.

Here's a Tip

Don't confuse revenues with receipts—

Revenues (operating and nonoperating) occur when a sale is made or when they are earned. Revenues are frequently earned and reported on the income statement prior to receiving the cash.

Receipts occur when cash is received/collected.

3. Gains such as the gain on the sale of long-term assets, or lawsuits result from a transaction that is outside of the primary activities of most businesses. A gain is reported on the income statement as the net of two amounts: the proceeds received from the sale of a long-term asset minus the amount listed for that item on the company's books (book value). A gain occurs when the proceeds are more than the book value.

Consider this example: Assume that a clothing retailer decides to dispose of the company's car and sells it for $6,000. The $6,000 received for the car (the proceeds from the disposal of the car) will not be included with sales revenues since the account Sales is used only for the sale of merchandise. Since this retailer is not in the business of buying and selling cars, the sale of the car is outside of the retailer's primary activities. Over the years, the cost of the car was being depreciated on the company's accounting records and as a result, the money received for the car ($6,000) was greater than the net amount shown for the car on the accounting records ($3,500). This means that the company must report a gain equal to the amount of the difference—in this case, the gain is reported as $2,500. This gain should not be reported as sales revenues, nor should it be shown as part of the merchandiser's primary activities. Instead, the gain will appear in a section on the income statement labeled as "nonoperating gains" or "other income". The gain is reported in the period when the disposal occurred.

Income Statement

Income Statement

Introduction to Income Statement

The income statement is one of the major financial statements used by accountants and business owners. (The other major financial statements are the balance sheet, statement of cash flows, and the statement of stockholders' equity.) The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income. We will use income statement and profit and loss statement throughout this explanation.

The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. For example, the heading may state:

"For the Three Months Ended December 31, 2015" (The period of October 1 through December 31, 2015.)

"The Four Weeks Ended December 27, 2015" (The period of November 29 through December 27, 2015.)

"The Fiscal Year Ended June 30, 2015" (The period of July 1, 2014 through June 30, 2015.)

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For example, if a company was not able to operate profitably—the bottom line of the income statement indicates a net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company. On the other hand, a company that has operated profitably—the bottom line of the income statement indicates a net income—demonstrated its ability to use borrowed and invested funds in a successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company management, competitors, government agencies, labor unions, and others.

The format of the income statement or the profit and loss statement will vary according to the complexity of the business activities. However, most companies will have the following elements in their income statements:

A. Revenues and Gains

1. Revenues from primary activities

2. Revenues or income from secondary activities

3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses

1. Expenses involved in primary activities

2. Expenses from secondary activities

3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)

If the net amount of revenues and gains minus expenses and losses is positive, the bottom line of the profit and loss statement is labeled as net income. If the net amount (or bottom line) is negative, there is a net loss.

Note: We provide business forms for preparing income statements plus a visual tutorial and exam questions pertaining to the income statement for members of

A. Revenues and Gains

1. Revenues from primary activities are often referred to as operating revenues. The primary activities of a retailer are purchasing merchandise and selling the merchandise. The primary activities of a manufacturer are producing the products and selling them. For retailers, manufacturers, wholesalers, and distributors the revenues resulting from their primary activities are referred to as sales revenues or sales. The primary activities of a company that provides services involve acquiring expertise and selling that expertise to clients. For companies providing services, the revenues from their primary services are referred to as service revenues or fees earned. (Some people use the word income interchangeably with revenues.)

It's critical that you don't confuse revenues with receipts. Under the accrual basis of accounting, service revenues and sales revenues are shown at the top of the income statement in the period they are earned or delivered, not in the period when the cash is collected. Put simply, revenues occur when money is earned, receipts occur when cash is received.

For example, if a retailer gives customers 30 days to pay, revenues occur (and are reported) when the merchandise is sold to the buyer, not when the cash is received 30 days later. If merchandise is sold in December, the sale is reported on the December income statement. When the retailer receives the check in January for the December sale, the retailer has a January receipt—not January revenues.

Similarly, if a consulting company asks clients to pay within 30 days of receiving their service, revenues occur (and are reported) when the service is performed (earned), not 30 days later when the consulting company receives the cash from the client.

If an attorney requires a client to prepay $1,000 before beginning to research the client's case, the attorney has a receipt, but does not have revenues until some of the research is done.

If a company sells an item to a buyer who immediately pays for it with cash, the company has both a receipt and revenues for that day—it has a cash receipt because it received cash; it has sales revenues because it sold merchandise.

By knowing the difference between receipts and revenues, we make certain that revenues from a transaction are reported only once—when the primary activities have been completed (and not necessarily when the cash is collected).

Let's reinforce the distinction between revenues and receipts with a few more examples. (Keep in mind that all of the examples below assume the accrual basis of accounting.)

A company borrows $10,000 from its bank by signing a promissory note due in 90 days. The company will have a receipt of $10,000 at the time of the loan, but it does not have revenues because it did not earn the money from performing a service or from a sale of merchandise.

If a company provided a $1,000 service on January 31 and gave the customer until March 10 to pay for the service, the company's January income statement will show revenues of $1,000. When the money is actually received in March, the March income statement will not show revenues for this transaction. (In March the company will report a receipt of cash and a reduction/collection of an accounts receivable.)

A company performs a $400 service on December 31 and receives the $400 on the very same day (December 31). This company will report $400 in revenues on December 31—not because the company had a cash receipt on December 31, but because the service was performed (earned) on that day.

On December 10, a new client asks your consulting company to provide a $2,500 service in January. You are uncertain as to whether or not this client is credit worthy, so to be on the safe side you ask for an immediate partial payment of $1,000 before you agree to schedule the work for January. Although your consulting company has a receipt of $1,000 in December, it does not have revenues in December. (In December your company will record a liability of $1,000.) Your consulting company will report the $1,000 of revenues when it performs $1,000 of services in January.

2. Revenues from secondary activities are often referred to as nonoperating revenues. These are the amounts a business earns outside of purchasing and selling goods and services. For example, when a retail business earns interest on some of its idle cash, or earns rent from some vacant space, these revenues result from an activity outside of buying and selling merchandise. As a result the revenues are reported on the income statement separate from its primary activity of sales or service revenues.

As is true with operating revenues, nonoperating revenues are reported on the profit and loss statement during the period when they are earned, not when the cash is collected.

Here's a Tip

Don't confuse revenues with receipts—

Revenues (operating and nonoperating) occur when a sale is made or when they are earned. Revenues are frequently earned and reported on the income statement prior to receiving the cash.

Receipts occur when cash is received/collected.

3. Gains such as the gain on the sale of long-term assets, or lawsuits result from a transaction that is outside of the primary activities of most businesses. A gain is reported on the income statement as the net of two amounts: the proceeds received from the sale of a long-term asset minus the amount listed for that item on the company's books (book value). A gain occurs when the proceeds are more than the book value.

Consider this example: Assume that a clothing retailer decides to dispose of the company's car and sells it for $6,000. The $6,000 received for the car (the proceeds from the disposal of the car) will not be included with sales revenues since the account Sales is used only for the sale of merchandise. Since this retailer is not in the business of buying and selling cars, the sale of the car is outside of the retailer's primary activities. Over the years, the cost of the car was being depreciated on the company's accounting records and as a result, the money received for the car ($6,000) was greater than the net amount shown for the car on the accounting records ($3,500). This means that the company must report a gain equal to the amount of the difference—in this case, the gain is reported as $2,500. This gain should not be reported as sales revenues, nor should it be shown as part of the merchandiser's primary activities. Instead, the gain will appear in a section on the income statement labeled as "nonoperating gains" or "other income". The gain is reported in the period when the disposal occurred.

clean power

clean power

clean power

الإمارات تدعم مساعي الطاقة المتجددة بـ2.6 مليار درهم

أكد الدكتور سلطان أحمد الجابر، وزير دولة والمبعوث الخاص لشؤون الطاقة وتغير المناخ، التزام دولة الإمارات بدعم الوكالة الدولية للطاقة المتجددة (إيرينا) ومساندتها في تحقيق أهدافها، موضحا أن الدولة خصصت منذ العام 2009 أكثر من 700 مليون دولار «2,57 مليار درهم» من الدعم في قطاع الطاقة المتجددة للبلدان النامية.

وأشار الجابر، خلال إلقائه كلمة الإمارات في الجلسة الافتتاحية للاجتماع الخامس للجمعية العامة للوكالة الدولية للطاقة المتجددة (آيرينا)، الذي بدأت فعالياته بأبوظبي أمس، إلى أهمية التعاون الفعّال بين صندوق أبوظبي للتنمية و(آيرينا) بهدف تمويل مشاريع الطاقة المتجددة والحد من تداعيات تغير المناخ، وفقا لما نقلته صحيفة "الاتحاد".

وأوضح أنه سيتم إطلاق خمسة مشاريع جديدة هذا العام من خلال التمويل الميسر الذي يوفره صندوق أبوظبي للتنمية بقيمة 57 مليون دولار، إضافة إلى 4 مشاريع جديدة ضمن المنح التي تقدمها دولة الإمارات لجُزُرْ المحيط الهادئ.

ويشارك في الدورة الخامسة للجمعية العامة لـ «آيرينا» مجموعة من القادة الحكوميين من 150 بلداً وممثلين عن 110 منظمة دولية، وذلك لمناقشة سبل التوسع العالمي في مجال الطاقة المتجددة ومواجهة التحديات العالمية مثل تغيّر المناخ والحصول على الطاقة وضمان أمنها.

ويناقش المجتمعون ما حققته الوكالة في العام الماضي وجدول أعمالها للعام المقبل.

ويبلغ العدد الإجمالي للدول المسجلة في الوكالة 170 دولة منهم 138 عضواً كاملاً، و33 دولة تعمل على استكمال إجراءات العضوية والمصادقة على الوثائق المطلوبة.

 massabook

العربية.نت

قال علي الشعفار، مدير قسم شؤون الطاقة في وزارة الخارجية الإماراتية، إن رفع نسبة الطاقات المتجددة إلى 10% من مزيج الطاقة بدولة الإمارات العربية المتحدة بحلول 2030 هو من أبرز أهداف خطط بلاده في قطاع الطاقة.

وذكر الشعفار في مقابلة مع قناة "العربية" أن الإمارات تهدف إلى توفير 7 مليارات درهم سنوياً باستخدام الطاقات المتجددة، موضحاً أن الطاقات المتجددة أثبتت تنافسيتها في توليد الكهرباء في الإمارات.

وقد أطلقت الوكالة الدولية للطاقة المتجددة قبل أيام "خارطة الطريق" لعام2030 حول الطاقات المتجددة للدول، والتي كانت أولها الإمارات، حيث أظهرت طموحاً واضحاً لزيادة الاعتماد على الطاقة المتجددة بدلاً من المصادر التقليدية.

amazon profits

amazon profits

amazon profits

513 مليون دولار أرباح "أمازون" خلال الربع الأول من 2016 

حقق العملاق الأمريكى للتسوق عبر الإنترنت "أمازون" أرباحا صافية خلال الربع الأول من هذا العام بلغت 513 مليون دولار أى حوالى 450.6 مليار يورو مقابل خسائر بلغت 57 مليون دولار أى حوالى 50 مليون يورو منذ عام مضى. كما ارتفعت قيمة مبيعاته بنسبة 28% فبلغت 29.1 مليار دولار أى حوالى 25.6 مليار يورو وترجع هذه النتائج إلى فرعه A W S الذى فرض نفسه كرائد على سوق كلود العام هذا ما أكده المدير المالى لشركة أمازون

amazon profits

513 مليون دولار أرباح "أمازون" خلال الربع الأول من 2016 

حقق العملاق الأمريكى للتسوق عبر الإنترنت "أمازون" أرباحا صافية خلال الربع الأول من هذا العام بلغت 513 مليون دولار أى حوالى 450.6 مليار يورو مقابل خسائر بلغت 57 مليون دولار أى حوالى 50 مليون يورو منذ عام مضى. كما ارتفعت قيمة مبيعاته بنسبة 28% فبلغت 29.1 مليار دولار أى حوالى 25.6 مليار يورو وترجع هذه النتائج إلى فرعه A W S الذى فرض نفسه كرائد على سوق كلود العام هذا ما أكده المدير المالى لشركة أمازون

FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT ANALYSIS

INTRO TO FINANCIAL STATEMENT ANALYSIS

Financial statement analysis provides information to those interested in the financial condition and operating results of a company. When financial statement items are considered individually, they usually will have a limited significance. A better perspective is gained when comparisons are made with previous statements, other businesses and industry averages. The main purpose of conducting financial analysis is to measure profitability and solvency. A business which is not able to make interest payments will experience difficulty in obtaining credit. This could lead either to reduced profitability or bankruptcy. A company with lower than average earnings may also find credit harder and more expensive to obtain.

ANALYTICAL PROCEDURES

Most analytical measures are expressed as percentages or ratios. This allows easy comparison with other businesses regardless of size. Horizontal and vertical analyses express entire financial statements in percentages. The horizontal analysis is an analysis of the rate of change in items of financial statements form year to year. The vertical (or common size) analysis presents each item as a percentage of total assets for the balance sheet and sales for income statement. When using these analytical measures, one should take the following factors into consideration: 1) industry trends, 2) changes in price levels, and 3) future economic conditions.

CURRENT POSITION ANALYSIS

A current position analysis is used to measure the ability of a firm to meet its current (and non-current) obligations. Three popular methods of analysis are: 1) determining working capital, 2) current ratio, and 3) quick ratio. The primary users of current position analysis are creditors. Working capital information is less meaningful than current or quick ratios. These ratios must be compared with other firms in the same industry to see if they are in line.

ACCOUNTS RECEIVABLE ANALYSIS

An accounts receivable analysis is used to measure a firm's solvency. The size and composition of accounts receivable is under continuous change, and therefore must be watched closely. Since funds tied up in accounts receivable yield no benefits or interest, it is best to keep this balance to a minimum. The quicker a firm is able to turn-over its accounts receivable, the lesser the risk of loss from uncollectible accounts. In addition, the firm has the option to put these funds into more productive uses.

ACCOUNTS RECEIVABLE ANALYSIS

Two commonly used methods to analyze accounts receivable are

1) accounts receivable turnover, and

2) number of days' sales in receivables (or days sales outstanding).

Both methods measure a firm's ability to generate sales and quickly collect its accounts receivable. A lower number of days' sales in receivables indicates a firm is collecting receivables quicker. Both of these measures must be compared with other firms in the same industry.

INVENTORY ANALYSIS

A business should maintain an adequate inventory balance to meet demands of its operations, but at the same time keep this balance to a minimum. When a firm has excess inventory, it will have higher operating expenses, reduced solvency, increased risks of losses due to price declines and obsolescence, and, in addition, it limits its chances to take advantage of more favorable investment opportunities. Two measures commonly used to assess inventory management efficiency are

1- inventory turnover ratios and

2- the number of days' sales in inventory.

These figures must be compared with industry averages to properly evaluate inventory management.

SOLVENCY ANALYSIS - LONG-TERM LIABILITIES

The following methods are commonly used to evaluate the safety of long-term creditors:

1) ratio of shareholders' equity to liabilities (debt-to-equity),

2) ratio of plant assets to long-term liabilities,

3) operating income divided by interest expense, as well as other payments (known as times-interest-earned or coverage ratios).

For all these methods of analysis, the higher the number, the greater the amount of safety. This information is used by investors, creditors, shareholders and management. It indicates the ability of a firm to meet its financial obligations.

PROFITABILITY ANALYSIS

Profitability analysis measures the ability to generate income. Common measures used are

1) profit margin: sales divided by net income,

2) total assets turnover: ratio of net sales to total assets,

3) return on assets: net income divided by total assets,

4) return on equity: net income divided by either shareholders' total equity or common stock only,

5) earnings per share of common stock,

6) dividends per share of common stock.

In addition, investors also use price-earnings ratio, and dividend yield. All these ratios are most useful to those interest in the future ability to prosper, that is the shareholders and other investors, as well as management.

REVIEW OF ANALYTICAL MEASURES

Analytical measures are used to assess solvency and profitability. The type of analytical measure chosen usually is dependent on the following factors: 1) the size of the company, 2) its capital structure, and 3) the type of business activity. Analytical measures are useful for evaluating the financial results of a business and the performance of management. They are also used to predict future performance.

CORPORATE ANNUAL REPORTS

Corporate annual reports contain information that summarizes the activities of the past year, and the future plans of the company. No standard or required format exists. However, annual reports must by law provide accurate financial statements. Most annual reports contain the following sections:

1) financial highlights,

2) management report,

3) president's letter,

4) an independent auditors' opinion, and

5) historical data.

FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT ANALYSIS

INTRO TO FINANCIAL STATEMENT ANALYSIS

Financial statement analysis provides information to those interested in the financial condition and operating results of a company. When financial statement items are considered individually, they usually will have a limited significance. A better perspective is gained when comparisons are made with previous statements, other businesses and industry averages. The main purpose of conducting financial analysis is to measure profitability and solvency. A business which is not able to make interest payments will experience difficulty in obtaining credit. This could lead either to reduced profitability or bankruptcy. A company with lower than average earnings may also find credit harder and more expensive to obtain.

ANALYTICAL PROCEDURES

Most analytical measures are expressed as percentages or ratios. This allows easy comparison with other businesses regardless of size. Horizontal and vertical analyses express entire financial statements in percentages. The horizontal analysis is an analysis of the rate of change in items of financial statements form year to year. The vertical (or common size) analysis presents each item as a percentage of total assets for the balance sheet and sales for income statement. When using these analytical measures, one should take the following factors into consideration: 1) industry trends, 2) changes in price levels, and 3) future economic conditions.

CURRENT POSITION ANALYSIS

A current position analysis is used to measure the ability of a firm to meet its current (and non-current) obligations. Three popular methods of analysis are: 1) determining working capital, 2) current ratio, and 3) quick ratio. The primary users of current position analysis are creditors. Working capital information is less meaningful than current or quick ratios. These ratios must be compared with other firms in the same industry to see if they are in line.

ACCOUNTS RECEIVABLE ANALYSIS

An accounts receivable analysis is used to measure a firm's solvency. The size and composition of accounts receivable is under continuous change, and therefore must be watched closely. Since funds tied up in accounts receivable yield no benefits or interest, it is best to keep this balance to a minimum. The quicker a firm is able to turn-over its accounts receivable, the lesser the risk of loss from uncollectible accounts. In addition, the firm has the option to put these funds into more productive uses.

ACCOUNTS RECEIVABLE ANALYSIS

Two commonly used methods to analyze accounts receivable are

1) accounts receivable turnover, and

2) number of days' sales in receivables (or days sales outstanding).

Both methods measure a firm's ability to generate sales and quickly collect its accounts receivable. A lower number of days' sales in receivables indicates a firm is collecting receivables quicker. Both of these measures must be compared with other firms in the same industry.

INVENTORY ANALYSIS

A business should maintain an adequate inventory balance to meet demands of its operations, but at the same time keep this balance to a minimum. When a firm has excess inventory, it will have higher operating expenses, reduced solvency, increased risks of losses due to price declines and obsolescence, and, in addition, it limits its chances to take advantage of more favorable investment opportunities. Two measures commonly used to assess inventory management efficiency are

1- inventory turnover ratios and

2- the number of days' sales in inventory.

These figures must be compared with industry averages to properly evaluate inventory management.

SOLVENCY ANALYSIS - LONG-TERM LIABILITIES

The following methods are commonly used to evaluate the safety of long-term creditors:

1) ratio of shareholders' equity to liabilities (debt-to-equity),

2) ratio of plant assets to long-term liabilities,

3) operating income divided by interest expense, as well as other payments (known as times-interest-earned or coverage ratios).

For all these methods of analysis, the higher the number, the greater the amount of safety. This information is used by investors, creditors, shareholders and management. It indicates the ability of a firm to meet its financial obligations.

PROFITABILITY ANALYSIS

Profitability analysis measures the ability to generate income. Common measures used are

1) profit margin: sales divided by net income,

2) total assets turnover: ratio of net sales to total assets,

3) return on assets: net income divided by total assets,

4) return on equity: net income divided by either shareholders' total equity or common stock only,

5) earnings per share of common stock,

6) dividends per share of common stock.

In addition, investors also use price-earnings ratio, and dividend yield. All these ratios are most useful to those interest in the future ability to prosper, that is the shareholders and other investors, as well as management.

REVIEW OF ANALYTICAL MEASURES

Analytical measures are used to assess solvency and profitability. The type of analytical measure chosen usually is dependent on the following factors: 1) the size of the company, 2) its capital structure, and 3) the type of business activity. Analytical measures are useful for evaluating the financial results of a business and the performance of management. They are also used to predict future performance.

CORPORATE ANNUAL REPORTS

Corporate annual reports contain information that summarizes the activities of the past year, and the future plans of the company. No standard or required format exists. However, annual reports must by law provide accurate financial statements. Most annual reports contain the following sections:

1) financial highlights,

2) management report,

3) president's letter,

4) an independent auditors' opinion, and

5) historical data.

COST VOLUME PROFIT RELATIONSHIPS

COST VOLUME PROFIT RELATIONSHIPS

COST VOLUME PROFIT RELATIONSHIPS

COST-VOLUME-PROFIT RELATIONSHIPS

Cost-volume-profit analysis examines the interrelationships between costs, revenues, selling prices, revenues, production volume and profits. Cost-volume-profit analysis is based on data provided by accounting. Total costs are separated into

1- variable costs which change with production level,

2- fixed costs which do not change with production level, and

3- mixed costs which are partly fixed and partly variable.

BREAK-EVEN ANALYSIS

At a break-even point, a business has neither profit nor loss. Break-even analysis is often used to predict and plan for the future. The break-even point is given by the quantity for which

REVENUES = FIXED COSTS + VARIABLE COSTS

where revenues and variable costs are estimated for various levels of production. A graphical representation shows that as fixed and variable costs increase, so does the break-even point. The break-even formula is modified to required a given profit.

BREAK-EVEN CHART

Break-even charts are used to help in understanding the relationships between sales, costs, and operating profits or losses. The capacity stated in percentage form is represented on the horizontal axis of the chart. Revenue and costs are represented on the vertical axis. The total costs line begins at a point on the vertical axis. This point is equal to total fixed costs. The sales line begins at zero. When the sales and total costs lines intersect, the break-even point has been reached.

PROFIT-VOLUME CHART

The profit-volume chart focuses on the profitability of a company. The vertical axis represents the maximum operating profit and the maximum operating loss that can be realized when capacity ranges from zero to 100%. The horizontal axis contains different levels of manufacturing capacity. Only one line is used by the profit-volume chart. This profit line begins at a negative point on the vertical axis which is equal to total fixed costs.

PROFIT-VOLUME CHART

When the profit line crosses the horizontal axis, a break-even point has been established. This break-even point is stated in terms of a productive capacity. The profit-volume chart can be used to measure the effects of changes in unit selling prices, total fixed costs, and unit variable costs. Each time such a change occurs, the profit-volume chart is revised.

SALES MIX

The sales mix must be taken into consideration because products have different selling prices, unit variable costs, and therefore profit margins. Starting with the proportion of each product in total revenue, each product selling price and cost, the contribution of each product to profits is determined. This information is incorporated on an increment basis product by product into the break-even analysis.

MARGIN OF SAFETY

The margin of safety is measured as either a sales dollar volume or a ratio. The margin of safety in terms of sales dollar volume is calculated by subtracting break-even sales from current sales. The margin of safety as a ratio is calculated by dividing the dollar volume sales safety margin by current sales. When the margin of safety is low, management must exercise caution because a small decline in sales revenue could lead to an operating loss.

CONTRIBUTION MARGIN RATIO

The contribution margin ratio is computed by subtracting variable expenses from sales and dividing the results by sales. The contribution margin ratio provides useful information on a firm's profit potential and the relationships between costs, profits, and volume. Contribution margins are often used to set business policies. Firms with large contribution margins and excessive productive capacity often concentrate their efforts on increasing production and sales volume.

COST VOLUME PROFIT RELATIONSHIPS

COST VOLUME PROFIT RELATIONSHIPS

COST-VOLUME-PROFIT RELATIONSHIPS

Cost-volume-profit analysis examines the interrelationships between costs, revenues, selling prices, revenues, production volume and profits. Cost-volume-profit analysis is based on data provided by accounting. Total costs are separated into

1- variable costs which change with production level,

2- fixed costs which do not change with production level, and

3- mixed costs which are partly fixed and partly variable.

BREAK-EVEN ANALYSIS

At a break-even point, a business has neither profit nor loss. Break-even analysis is often used to predict and plan for the future. The break-even point is given by the quantity for which

REVENUES = FIXED COSTS + VARIABLE COSTS

where revenues and variable costs are estimated for various levels of production. A graphical representation shows that as fixed and variable costs increase, so does the break-even point. The break-even formula is modified to required a given profit.

BREAK-EVEN CHART

Break-even charts are used to help in understanding the relationships between sales, costs, and operating profits or losses. The capacity stated in percentage form is represented on the horizontal axis of the chart. Revenue and costs are represented on the vertical axis. The total costs line begins at a point on the vertical axis. This point is equal to total fixed costs. The sales line begins at zero. When the sales and total costs lines intersect, the break-even point has been reached.

PROFIT-VOLUME CHART

The profit-volume chart focuses on the profitability of a company. The vertical axis represents the maximum operating profit and the maximum operating loss that can be realized when capacity ranges from zero to 100%. The horizontal axis contains different levels of manufacturing capacity. Only one line is used by the profit-volume chart. This profit line begins at a negative point on the vertical axis which is equal to total fixed costs.

PROFIT-VOLUME CHART

When the profit line crosses the horizontal axis, a break-even point has been established. This break-even point is stated in terms of a productive capacity. The profit-volume chart can be used to measure the effects of changes in unit selling prices, total fixed costs, and unit variable costs. Each time such a change occurs, the profit-volume chart is revised.

SALES MIX

The sales mix must be taken into consideration because products have different selling prices, unit variable costs, and therefore profit margins. Starting with the proportion of each product in total revenue, each product selling price and cost, the contribution of each product to profits is determined. This information is incorporated on an increment basis product by product into the break-even analysis.

MARGIN OF SAFETY

The margin of safety is measured as either a sales dollar volume or a ratio. The margin of safety in terms of sales dollar volume is calculated by subtracting break-even sales from current sales. The margin of safety as a ratio is calculated by dividing the dollar volume sales safety margin by current sales. When the margin of safety is low, management must exercise caution because a small decline in sales revenue could lead to an operating loss.

CONTRIBUTION MARGIN RATIO

The contribution margin ratio is computed by subtracting variable expenses from sales and dividing the results by sales. The contribution margin ratio provides useful information on a firm's profit potential and the relationships between costs, profits, and volume. Contribution margins are often used to set business policies. Firms with large contribution margins and excessive productive capacity often concentrate their efforts on increasing production and sales volume.

The Clean Energy Revolution

The Clean Energy Revolution

The Clean Energy Revolution

Fighting Climate Change With Innovation

By Varun Sivaram and Teryn Norris

the UN Climate Change Conference in Paris came to a close in December 2015, foreign ministers from around the world raised their arms in triumph. Indeed, there was more to celebrate in Paris than at any prior climate summit. Before the conference, over 180 countries had submitted detailed plans to curb their greenhouse gas emissions. And after two weeks of intense negotiation, 195 countries agreed to submit new, stronger plans every five years.

But without major advances in clean energy technology, the Paris agreement might lead countries to offer only modest improvements in their future climate plans. That will not be enough. Even if they fulfill their existing pledges, the earth will likely warm by some 2.7 to 3.5 degrees Celsius—risking planetary catastrophe. And cutting emissions much more is a political nonstarter, especially in developing countries such as India, where policymakers must choose between powering economic growth and phasing out dirty fossil fuels. As long as this tradeoff persists, diplomats will come to climate conferences with their hands tied.

It was only on the sidelines of the summit, in fact, that Paris delivered good news on the technology front. Bill Gates unveiled the Breakthrough Energy Coalition, a group of more than two dozen wealthy sponsors that plan to pool investments in early stage clean energy technology companies. And U.S. President Barack Obama announced Mission Innovation, an agreement among 20 countries—including the world’s top three emitters, China, the United States, and India—to double public funding for clean energy

Tech education

Tech education

Tech education

Opening Minds on Ed Tech

By Bill Gates  | April 21, 2016

Every teacher deserves the chance to be phenomenal.

It’s easy to say, and I don’t know anyone who would disagree with the sentiment. But in the history of American education, this vision has proven hard to deliver on. Whenever I talk to teachers, one of their biggest concerns is that they don’t have the tools they need to do their best work. We see the same results in polls of teachers.

I’m optimistic that all of us who are passionate about education can solve this problem. One of the main reasons I’m so hopeful is that advances in technology will make it easier to give teachers the support they deserve. For example, teachers will be able to upload videos of themselves and get advice from their peers, watch the best teachers in the world at work, and get real-time feedback from their students. Software will also help identify which students are having trouble and adjust for their own learning style, leaving teachers more time to focus on the kids who need extra personal attention. (I wrote in more detail about how software will improve education worldwide in last year’s Annual Letter.)

Developers will play a key role in making these advances. I recently had a chance to talk with a number of the leading companies doing this work when I spoke at the ASU GSV Summit, an education-technology conference in San Diego, California. I encouraged them to work more closely with teachers to understand their needs, and to make sure their products deliver measurable results in the classroom. Technology can revolutionize the way teachers and students work together—but only if we base our approaches on evidence about what works.

Below you can read the transcript of my onstage Q&A. I also gave a speech. There’s a lot of exciting work going on in this field, and I definitely left San Diego feeling better than ever about the potential for technology to support teachers and students in a big way.

ASU GSV Q&A

QUESTION:

You have concerns about the pace of change and about whether we’re making adequate impact quickly enough and I’m just curious if you have advice for the entrepreneurs out there as they think about it. How do we accelerate this pace and have bigger impact on the students?

BILL GATES:

Well, in the K-12 area, the way the products are selected, the way money is budgeted for those, over time, that’s really got to change. We’ve got to free up more of the professional development money. We’ve got to get some example products that are clearly so successful that it really opens peoples’ minds to what the role of technology here is. I’d say we’re pretty early in that process.

There are a lot of teachers who are willing to be the pioneers in this area—that’s where we’ve gotten the adoptions so far. There are a lot of cases where we try and go beyond and get a district-wide adoption. We really have to look at why the uptake by the actual usage isn’t quite there, because then that creates something that other people hear about and they’re very, very reluctant.

We do have the benefit though—the digital tools now with the combination of PC, tablet, and cell phone. The three of those we’re close to universality. The idea that the connection was holding things back or access to a device is holding things back—those haven’t gone away, but particularly if some of the experience can be done on a small screen—then even when you get outside the United States the access levels are starting to be a lot higher.

There’s a very positive framework. There’s a sense of need, you know, as people look at those college residence numbers, they look at those completion numbers, and the whole cost equation, higher education is really staring at a tough set of constraints. So that should serve to drive the demand.

QUESTION:

It feels to me like we’re hitting a proverbial tipping point in the embrace of personalization and a better understanding of what adapted means, personalized means. What do you see over the next five years?  What’s your prognosis both in K-12 and for higher ed actually?

BILL GATES:

Well, personalized learning is a fairly clear definition. But I think there are different things that come under that umbrella.

Math is the most straightforward because the idea of assessing knowledge very efficiently and saying, “OK, if you really can answer those questions, then we’ll move on to the other area.” That’s far more concrete than say, writing or history.

I was pretty amazed in my last visit to Summit to see how they have taken all the different areas and really given the students a sense of some degree of choice in what they’re doing and a real sense of what they need to get done.

The idea of an agency—where the student knows how much they have to get done, they’re making some selections there that really creates a different relationship between the student and teacher. So I’m hopeful that for math, we can get a very broad rollout of that within the next five years.

It does require the schools to be open-minded because when you go to those new classrooms’ locations, they’re not just in a typical classroom. They’ve been allowed to remodel some of that space. So the kids are moving around and it’s quite amazing. But there was an upfront investment there and a decision to get all the teachers engaged in that new model.

It’s a lot easier if you can do the current physical classroom teacher by teacher. Some stuff fits into that. But the biggest impact is where you can make changes in those things as well—it’s a school-wide way of doing things.

As you get up into higher-ed, it’s a lot more straightforward because then there’s an assumption that, largely, the student is motivated. The student knows what they’re doing. And it is there (in higher-ed), the interactivity, the personalization—particularly in the remedial courses where we’ve gone the furthest—that we’ve seen a dramatic payback in.

QUESTION:

We have a section called “Tomorrowland” at the Summit this year. Do you think the embrace of these new technologies—virtual reality, augmented reality—are going to accelerate the adoption of personalized learning?

BILL GATES:

Yes, I think virtual reality can make things more engaging. And there are certain things where you have more of a sense—even if you can't, say, build a car in the virtual world, you can sit there and put the pieces together and almost feel like you're doing far more than would be practical in the real world.

There's a lot of pedagogy about understanding the science and the math (principles) that really won't change much just because we put it in a virtual reality framework.

School is always about motivation. The material has been in the textbooks for a long time. In some subject areas, it hasn't even changed that much. If we can use it to draw people in, then that's incredibly valuable.

I'm just starting this for some of the videos I do—like where I go out to a refugee camp or to a developing country, to actually make a virtual reality movie. So people actually have a sense so they can see what it was like and look around and feel it.

And yes, we see it as we're creating those early stage things. We see a lot of engagement. And so combining that with the underlying concepts and not just having it be a distraction.

In learning science, there are a lot of things about—you make things too animated, too colorful, things like that—it often distracts from what you're really trying to get done, which is the attention to a few basic concepts. So I'm sure we'll be able to abuse virtual reality as well as we have ANY new technology that's out there.

I do think in terms of design, lots of engineering things, there's lots of places where it will play a practical role and hopefully draw people in.

And the cost—particularly where you're just taking the cellphone and repurposing that—we won't have to wait a whole decade before the accessibility is there for the lower-end versions of this. The higher-end versions—having an environment where you spend the $500-$1,000 and have it as a shared device—we should have that in a lot of locations as well.

QUESTION:

One of the things I most admire about you and Melinda are that you’re proactive. You’re avid visitors. You visit schools. You’ve talked about some of them a number of times already. You visit schools. You visit universities. What’s the key takeaway you’ve seen in the most recent period in terms of your visits? What are you hearing from educators on the ground that you’re incorporating into your work?

BILL GATES:

Well, it’s been very interesting to learn about who online (learning) is working for. And so far, a lot of the people who are engaged online are more of these adult students who are tougher because their scheduling is more difficult, but they’re easier because they come back for a reason. That is, they’re self-selected that, “OK I want to become a nurse.” “I want to get this engineering degree.”

And so, online, because it fits into that time flexibility and because they’re willing to persevere—that’s been the initial audience that that’s worked well for.

But there are people now, including ASU, who are using it for other cohorts. And they’re taking the very latest, which is far more engaging content than we’ve had in the past, and trying to make it work for everyone.

I think in education, there’s two types of visits you can do. When you get discouraged and don’t think that anything can happen—then you’ve got to go visit KIPP or Green Dot, or High Tech High, or Summit, and see classrooms—or Rocket Ship, which actually is doing some very interesting things.

Go to one where it all really came together: great teachers, a new approach, and you get reminded, “Wow—if we could do this for every student this would be phenomenal!” Then if you ever think, “Oh boy! This is great.” Then go and visit a college that has a 19 percent completion rate or go to an inner-city high school and get a sense of the disengagement that’s there and the amount of resources that’s just going to make sure that the environment is secure.

And so we have plenty of opportunity to see both of those. I do more visits to the ones that are doing well, because those are the best practices we want to spread.

My most recent trip this fall was to Appalachia and I thought that would be a mix. But because Kentucky has invested in their schools over the last 10 years, what we saw was mostly uplifting. These are public schools, very low-income kids, and the way those communities have come together around some of the new curriculum, better professional development, was really inspiring. So that gives you maybe a year or two of motivation you need to do it even more.