Using Income Statements

The Corporate Financial Accounting course has broadened my knowledge of corporate entities and their business activities. It is amazing how I am now able to relate concepts learned from the class to real-world business activities.

I went through some of the reading materials for the Corporate Financial Accounting course. The materials helped a lot with understanding the concepts better.

Now I understand that companies as corporate entities must plan their business activities. They also finance their business’ activities, invest in the activities, and engage in operating activities. We can simply say then that a company’s activities are in three (3) categories. These are:

1. Financing activities
2. Investing activities
3. Operating activities

Financing: The financing activities of a company involve the acquisition of the company’s assets through a combination of owner and non-owner financing. The contributions from the owners, we call Owner’s equity while the contributions from non-owner financing, we call debt or liability.

Investing: A company’s investing activities are similar to its financial activities. It involves activities used to acquire assets for the company.

Operating: The operating activities are however somewhat different from the first two company’s activities. Hence I would like to write a few things I have learned about this type of activity.

I have learned that the operating activities of a company involve the use of the company’s resources to produce, promote and sell its products and services. We can categorize the company’s activities into two. These are the Input markets and the Output markets.

Input markets: We incur expenses arising from business operations like the supply of materials, labor, and so on. For example, expenses can come from inventory, salaries, materials, and logistics. We regard them as input markets.

Output market: We incur expenses arising from business operations targeted at a company’s customers. For example, we can incur expenses from the marketing and distribution of the company’s goods and services to the customers.

I have learned that the input market generates expenses while the output market generates sales (revenue). To better understand the input and output markets, I noted that the input market generates expenses while the output market generates revenue, also known as sales.

We can generate a net income from the company’s operating activities. Net income is the outcome when we deduct the total amount of expenses from the total amount of revenue realized. When the net income exceeds the expenses, we have made a profit but when it is less than the expenses, we have made a loss.

Income statement

We can use the Income statement also known as the statement of profit or loss to report a company’s performance over a period of time. The structure of the Income statement has three main components. They are;

1. Revenue
2. Expenses
3. Profit/Loss

I find this financial report very useful in making decisions around investments. With the income statement, I can tell if a company is doing well to generate sales and manage its expenses. With such information, I can also ascertain if my investment would yield a good return on investment.