3 Income Statements (P&Ls)
3Income Statements(P&Ls)Inside This Chapter The Importance of Income Statements The Income Statement Format Reading the Income StatementChapter Learning ObjectivesAfter completing this chapter, you should be able to: Explain the purpose of an incomestatement. Identify the three major types offinancial information included inan income statement.M03 NRA5241 01 SE C03.indd 52 Identify operating costs ascontrollable, noncontrollable,fixed, variable, or semivariable. Explain how managers read andanalyze an income statement.06/06/12 5:41 PM
Key Termsaccounting period, p. 58fixed costs, p. 67beverage cost percentage,p. 64food cost percentage,p. 64budget, p. 70gross profit, p. 64prime cost, p. 65controllable costs, p. 66income statement,p. 54profit and loss (P&L)report, p. 54cost of sales percentage,p. 64investor, p. 56revenue source, p. 61lender, p. 56semivariable costs, p. 67expense timing, p. 65net earnings, p. 70variable costs, p. 67cost of sales, p. 63noncontrollable costs,p. 66payment terms, p. 57Case Study“Well, will we get our bonuses this month or not?” asked Marco, the assistantmanager at the Waterfalls Grill. He was talking to Kayla, the establishment’smanager.Both Marco and Kayla were paid a monthly salary. However, if their operationachieved monthly financial targets established by the owners, then Kayla andMarco qualified for bonuses. It was one day from the end of the month, andMarco was getting anxious.“We’ll hit our targeted revenue numbers,” replied Kayla, “but I’m not sureabout our costs. I hope we did well on those, but I just don’t know the totalson all of our expenses yet. So I can’t tell for sure if we’ll hit our profit target.”1. Why do you think owners would tie their managers’ compensation totheir ability to achieve targeted revenue, expense, and profit goals?2. How frequently do you think managers should be informed about thefinancial performance of the operations they are managing? What willhappen if they are not informed?53M03 NRA5241 01 SE C03.indd 5306/06/12 5:41 PM
CHAPTER 3Income Statements (P&Ls)The Importance of Income StatementsOwners and managers of restaurant and foodservice operations want toregularly assess the financial status of their business. They seek answers tothree important questions: What is the amount of revenue being achieved? What is the level of expense being incurred? What is the amount of profit being achieved?Managers of nonprofit restaurant and foodservice operations such as those inhospitals, nursing homes, schools, and colleges have the same concerns abouttheir own financial performance.Recall the profit formula from chapter 1:Revenue Expense ProfitFrom the profit formula, it is easy to see that managers must be concernedabout revenue and expense if they are concerned about their profit.Manager’s MemoIt is a mistake to think thatnonprofit means there is noconcern for revenue and expenselevels. Managers of nonprofitfacilities such as those in hospitals, schools, and military basesknow that revenue must consistently exceed expenses. Otherwise, no money will be availablefor the replacement of worn-outequipment or the remodeling ofkitchen or dining facilities.Some operations are subsidizedby the nonprofit entity managingthe foodservice. Because of this, itmight appear that managers ofthese operations do not have toface financial pressures. In fact,because nonprofit restaurant orfoodservice operations often workon very tight budgets, controllingexpenses and optimizing revenueare especially critical management tasks in these operations.The income statement is the financial report that details an operation’srevenue, expense, and profit for a specific time period. The income statementis commonly referred to by several other terms: The statement of income The statement of income and expense The profit and loss (P&L) statement The monthly (or annual) summary of income and expenseOf the several alternative terms for an income statement, the profit andloss (P&L) report is one of the most popular among nonaccountants.Many accountants prefer to use the terms statement of income or incomestatement. Each of these terms will be used in this book to refer to thesame report.The best way to see at a glance how an operation is performing financially isby reading and analyzing its income statement. An income statement providesa snapshot of the operation’s financial activity for a specific period of time,such as one month.Income statements also provide financial data used to create other financialdocuments. Additionally, managers use income statements to analyze trendsand identify areas for improvement. In simple terms, an income statement isa compilation of sales and cost information for a specific period of time. Itshows whether an operation has made or lost money during the time periodcovered by the report. When this information is known, better businessdecisions can be made by individuals and organizations. The financial54M03 NRA5241 01 SE C03.indd 5406/06/12 5:41 PM
The Importance of Income Statementsinformation presented in income statements is of great interest to fourgroups: Managers Owners Investors Others, including creditors, lenders, and employeesManagersThe best restaurant and foodservice managers are professionalswho care very much about the quality of their work. When foodis well prepared and properly served (Exhibit 3.1), customers areattracted and revenues typically increase. When food-productionand service costs are well managed, expenses stay within theestimated levels. When revenues are optimized and costs aremanaged, profits are generated.Exhibit 3.1Income statements detail an operation’s revenue, expense, andprofit. Many managers see these financial statements as a scorecard for assessing their own managerial performance. Theperformances of managers, as measured by the financial resultscontained in the income statements of the operations orestablishments they run, are often used to determine pay. Inaddition, bonuses and other financial incentives are often tied tothe financial results of an operation as reported in its income statement.In many companies, job promotions are based in large part on a manager’sperformance as measured by the income statement. Income statements arevery important in the careers of professional restaurant or foodservicemanagers. The ability to read and analyze them is an essential skill.OwnersWhile the managers of restaurant and foodservice operations are keenlyinterested in the financial performance of their businesses, the owners of thebusinesses are usually even more interested. Whether sole proprietors,partners, or corporations, business owners are interested in key pieces ofinformation contained in the income statement:Think About It . . . Managers who attain superiorfinancial performance typicallyearn higher pay.Would you pay more formanagers who consistentlyachieve the financial goals thatyou set? What would happen ifyou did not pay them more? Did the business make a profit? Did the profits achieved by the business reach the targets that wereestablished for them? Are profits increasing when compared to earlier time periods? Are profits decreasing when compared to earlier time periods?55M03 NRA5241 01 SE C03.indd 5506/06/12 5:41 PM
CHAPTER 3Income Statements (P&Ls)Owners are also interested in the revenue and expense portions of an incomestatement because these areas directly impact profits. If revenue levels do notreach their targets, it may be difficult or impossible to reach profit goals.Similarly, if expense levels exceed the targets established for costs, it may notbe possible for the business to reach targeted profit levels.Although the owner is the manager in some operations, in many otherssomeone else manages the operation. When that is the case, incomestatements allow the owner to monitor the manager’s performance on aregular basis without actually being in the operation.Think About It . . . Before investing in anestablishment, would you wantto first know how profitableit was?for BusessinOpenIf you decided to make theinvestment, how often wouldyou want to read a report onthe profits?RestaurantTechnologyMany business ownersuse their Web sites to attractinvestors by posting financialinformation taken from theirincome statements. This isespecially the case with businessesthat are owned by corporations,because these organizations issuestock as a way of raising money tofund future growth.When information taken fromincome statements is posted for allto see, it is especially important thatthe information is clear, accurate,and easy to read. The consistent useof GAAP (see chapter 1) is especiallycritical when using advancedtechnology communication devicesfor the posting of importantfinancial information.Most, if not all, owners purchase and operate businesses with the intent ofmaking a profit. In some cases, a business will not make a profit for a specificmonth or longer. Then the owners may have to supply additional money tokeep the business operating until it is profitable. Income statements helpowners estimate the amount of money they may be able to take out of abusiness from the profit it generates. Income statements can also help ownersestimate the amount of money that may be needed by an unprofitablebusiness to pay its bills until it is profitable enough to do so on its own.InvestorsIn some restaurant and foodservice operations there are a number ofinvestors. Investors supply money to a business. In most cases, investorssupply the money to increase their own wealth. They want to receive moremoney than was initially invested in return for investing. Investors typicallyreceive their money from the profits made by a business. Therefore they arekeenly interested in the profits reported on the income statement.Income statements provide information on profitability and operationalefficiency. Investors want to see this information before they make theirinvestments. For this reason many businesses prepare income statements notonly annually, but on a monthly basis as well.OthersMost investors actually invest with the hope that the money they supply to abusiness will be returned to them along with profits. Lenders supply moneyto a business with the legal requirement that the money, and any interestcharged for it, be repaid on an agreed-upon schedule.Lenders to restaurants and foodservice operations typically include banks,insurance companies, savings and loans, and credit unions. Other sources forborrowing often include friends or relatives. Regardless of the source of money,lenders who consider making a loan to a business will want to know if the loancan be repaid. Because the income statement shows the amount of revenuegenerated by a business minus the costs, readers of an income statement have agood idea of the remaining funds available for loan repayment.56M03 NRA5241 01 SE C03.indd 5606/06/12 5:41 PM
The Importance of Income StatementsIf the information on an income statement shows large numbers of dollarsavailable for loan repayment, lenders are more inclined to make loans to thebusiness. If the income statement shows limited dollars available for loanrepayment, lenders will be reluctant to make loans to the business.Before a business has opened, it should develop a complete business plan.Lenders rely on the pro forma information in the operation’s pre-openingbusiness plan (see chapter 2) to help estimate the ability of the business torepay its loans on time. For that reason, pro forma forecasts of future incomestatements estimating revenue, expenses, and profits for a designated timeperiod are an essential part of the financial plan.In addition to having investors and lenders, most restaurant and foodserviceoperations will purchase products and services from suppliers that can extendcredit to their business. For example, if an operation purchases food from afood supplier, it is common for the establishment to pay the invoice for thefood delivered once or twice per month. During the period between when thefood is delivered (Exhibit 3.2) and the food is paid for, the supplier hasextended credit to the business. Before agreeing to extend credit to a business,the supplier will likely want to know a great deal about the ability of thebusiness to pay its bills in a timely way.Think About It . . . Would you rather lend moneyto a business that was alreadyopen with a consistent historyof profitable operation, or to ayet-to-be-open business with abusiness plan including forecastsof future profits? Why?Exhibit 3.2Sharing income statements with potential creditors is one way for a businessto establish its creditworthiness with its suppliers. When suppliers know abusiness is profitable, as demonstrated on its income statements, they aremore inclined to extend credit. They are also more inclined to make paymentterms as favorable as possible. Payment terms are the conditions under whicha supplier will complete a sale. Typically, these terms specify the time periodallowed to a business to pay the amounts due to the supplier.Payment terms for those businesses that have not established creditworthinessmay include payment in advance or payment on delivery. For thosebusinesses that have used their income statements to help establishcreditworthiness, the supplier may offer a deferred payment period of 30 daysor even more.Restaurant and foodservice suppliers will, in some cases, even vary the pricesthey charge managers for products and services. They base prices on theirperceptions of a business’s ability to pay its bills. For that reason, the incomestatement can provide valuable information that can actually help lower abusiness’s costs.While most operations do not share income statement information directlywith their employees, they are directly affected by the information. This isbecause managers and owners make decisions about the amount of moneyavailable to pay employees, offer bonus programs, and provide employeebenefits based on information contained in a P&L.57M03 NRA5241 01 SE C03.indd 5706/06/12 5:41 PM
CHAPTER 3Income Statements (P&Ls)The Income Statement FormatThe income statement is formatted in a manner that exactly follows the profitformula:Revenue Expense ProfitAs a result, an income statement contains three major sections: Revenue Expense ProfitExhibit 3.3Basic Income StatementFormatLess (minus)REVENUEEXPENSEEqualsPROFITRemembering the order of information presented in an income statement iseasy. When accountants prepare an income statement, they first list and addall revenue. They then list and subtract expenses from revenue to calculateprofit. Income statements may be very brief or very detailed, but all follow thesame basic format. The basic format of an income statement is presented inExhibit 3.3.Note that Exhibit 3.3 identifies what will be presented in the incomestatement. It is incomplete, however, because it does not address the timeperiod from which the information was taken. To create an actual incomestatement, accountants must first determine the time period that the P&Lwill address.Defining the Accounting PeriodA P&L can provide summary financial details about an operation. However,the time period to be summarized must first be determined and clearlydefined. The development of a P&L begins with the statement of theaccounting period it addresses. An accounting period is any time period forwhich financial records are prepared. For example, an accounting periodcould consist of 12 months. Thus, a manager could create a P&L thatsummarizes revenue, expense, and profits achieved for the time periodJanuary 1 through December 31. The accounting period in this example is1 year. However, any 12 consecutive months—for example, October 1 throughSeptember 30—is also an accounting period of 1 year. In fact, GAAP allowsany 52-week consecutive period to be considered 1 year.Annual P&LsIn nearly every case a restaurant or foodservice operation will want to preparea P&L on at least an annual basis. This is because many business taxes arepayable annually. Most often, taxes are based on achieved profit levels. As aresult, the preparation and payment of personal or business taxes cannot becompleted without information from the income statement. In addition to itsuse in the preparation of taxes, an annual P&L gives the establishmentmanager a summary of the overall performance in the previous 52 weeks.58M03 NRA5241 01 SE C03.indd 5806/06/12 5:41 PM
The Income Statement FormatTo better understand the importance of an annual P&L, consider anestablishment that operates in a busy ski resort area. The operation may beextremely busy and profitable during the ski season. In that time period,revenue will be extremely high. When the ski season ends for the year,however, the business may not experience the same revenue levels. Bypreparing an annual P&L the owners of this operation can assess how theirbusiness performed during its busiest and least busy times.Monthly P&LsThe main reason accountants prepare financial reports is so their readers canuse them to make better business decisions. In most cases businesses preparemonthly P&Ls because the information contained in them is of criticalimportance to timely decision making (see Exhibit 3.4).Think About It . . . Food and beverage operationsnear ski areas or beaches areexamples of businesses thatexperience wide fluctuations inmonthly revenue.What are other examplesof operations that likelyexperience similar widevariations in monthly revenue?Exhibit 3.4Knowing about the precise amount of revenue generated in amonth helps managers address key operational questions: Did monthly revenue levels reach the levels predicted? Is revenue increasing when compared to prior accountingperiods? Is revenue decreasing when compared to prior accountingperiods?In restaurant and foodservice operations serving alcohol,additional questions can be addressed: What was the amount of food revenue achieved? What was the amount of alcoholic beverage revenueachieved? What proportion of total revenue was contributed by food sales? What proportion of total revenue was contributed by alcohol sales?Managers must know about their sales levels, but knowing about the costs ofoperating a business in a specific month also helps address key operationalquestions: How much was spent for food and beverages during this accountingperiod? How much was spent for labor during the period? How much was spent for all other expenses during the accountingperiod? What were the total monthly costs of operating the business? Did monthly expenses exceed estimated levels? If so, in what specific areas did expenses exceed estimates? If not, in what specific areas were expenses lower than expected?59M03 NRA5241 01 SE C03.indd 5906/06/12 5:41 PM
CHAPTER 3Income Statements (P&Ls)Knowing revenue and expense is important, but knowing the amount ofprofit, or loss, achieved in an operation helps owners better understand andaddress key issues: What were the profits for this accounting period? What percentage of revenue did the profits represent? Did profits achieve estimated levels? Are profits increasing compared to prior accounting periods? Are profits decreasing compared to prior accounting periods? Are profits sufficient to allow the business to pay its bills as they comedue, or must additional funds be acquired? How much, if any, money can be taken from the business for use by theowners of the business?The answers to questions of these types can be addressed by both monthlyand annual P&Ls. Preparing summary financial information on a monthlybasis versus only on an annual basis gives owners and managers timelier andmore detailed financial facts. In nearly all cases, this helps improve decisionmaking.P&Ls for Other Accounting PeriodsExhibit 3.5Gas Costs (Monthly P&L Approach)MonthMonthly CostDaily Cost 2,800 100March3,100100April3,000100FebruaryIncreasingly, some operations prefer to create income statements thataddress a 28-day period. Proponents cite the advantages of havingequal four-week time periods from which to make decisions. Tobetter understand the advantages, consider the manager who isconcerned about costs related to the usage of natural gas for cookingin the kitchen. See Exhibit 3.5 to review the manager’s findings.From the monthly expense data it appears the cost of gas fluctuates.The cost of gas increased in March when compared to Februarycosts; but April costs decreased when compared to March. Note that the dailycost of gas, however, did not change. The change in monthly cost reflects thefact that February has 28 days, while March has 31 and April has 30. Using28-day accounting periods, the gas usage for each period would have beenreported as 2,800. This makes it easier to detect real changes in revenueor expenses, rather than changes that occur only because the lengths ofmonths vary.A second reason for increased popularity of the 28-day accounting period isrelated to the specific days in the week. Each 28-day accounting period has thesame number of weekdays and weekend days, as well as the same number ofMondays, Tuesdays, Wednesdays, and so on. This can be important for thosebusinesses that wish to compare P&L results from two accounting periods, butwant to ensure that each has equal numbers of Friday and Saturday nights.60M03 NRA5241 01 SE C03.indd 6006/06/12 5:41 PM
The Income Statement FormatSome restaurant and foodservice managers preparequarterly (three consecutive months) P&Ls. Othersprepare weekly income statements and some even estimateP&L results on a daily basis. In most cases such rapidestimates lack accuracy. This is because they would notinclude the detailed expense-related information neededto produce a precise P&L using GAAP. They may,however, prove useful in some cases.Regardless of the accounting period addressed by a P&L,that time period should be clearly stated near the top ofthe report. This helps the reader easily identify it beforethe document is reviewed.After determining the accounting period to be addressedin an income statement, the revenue generated in thattime period is identified. Exhibit 3.6 is an example of anincome statement prepared for Richter’s Steak House, anestablishment that serves both food and alcoholicbeverages. Note that it is a monthly P&L and the timeperiod it addresses is 4/1/2012 to 4/30/2012.Recall that many retaurant and foodservice professionalsmay use the terms income, revenue, and salesinterchangeably. Some even use the term sales revenue.In Exhibit 3.6 sales for the period are listed first, and theyconsist of 80,000 in food sales and 20,000 in beveragesales. These two figures are then added to yield total salesof 100,000.SALESFood 80,000Beverage20,000Total Sales 100,000COST OF SALESFood 32,000Beverage5,000Total Cost of Sales 37,000Management6,000Staff20,000Employee benefits4,000Total Labor 30,000Prime CostFood 80,00020,000 100,000In this operation two revenue sources are shown. Arevenue source is a distinct area, for example a bar ordining room, in which sales are generated. A revenuesource can also be the sales generated by a specificproduct, for example food or gift cards. In general, themore revenue sources identified on an income statement,the greater the detail provided about the business’s salesproduction. 67,000Other Controllable Expenses:Legal/accounting500Music and entertainment5,000Marketing250Utility services2,000General and administrative4,050Repairs and maintenance2,000Total Other Controllable ExpensesControllable IncomeSales:Total salesRichter’s Steak House P&L For the Period:4/1/12 to 4/30/12LABORAccounting for RevenueBeverageExhibit 3.6 13,800 19,200Noncontrollable Expenses:Rent 2,000Total Noncontrollable Expenses 11,300Operating Income 7,900Interest expense800Other (income) expense200Income Before Income Taxes 6,90061M03 NRA5241 01 SE C03.indd 6106/06/12 5:41 PM
CHAPTER 3Income Statements (P&Ls)In the restaurant and foodservice industry there are manycommonly identified sales areas and revenue sources:Exhibit 3.7 Distinct dining areas (in operations with more thanone dining area) Banquets Catering Drive-through Carryout Delivery Lounge or bar (Exhibit 3.7) Bakery Gift shop Gift certificates and gift cards Merchandise, such as T-shirts, caps, and souvenirsThe Uniform System of Accounts for Restaurants (USAR) provides a list ofsuggested revenue sources for use by managers preparing income statements.Those preparing income statements must list all of the revenue generated byeach revenue source during the accounting period addressed by the P&L. Theymust also include all revenue sources.PercentagesExhibit 3.8Detail from Richter’s Steak House P&LFor the Period: 4/1/12 to 4/30/12SalesFoodSales Percentage 80,000BeverageTotal Sales20,000 100,00080%20100%Some income statements list the percentage of revenue generatedby each revenue source in addition to the source’s monetarycontribution. Exhibit 3.8 shows the percentage of revenuegenerated by food sales and by beverage sales for the Richter’sSteak House P&L.To calculate the sales percentage of a revenue source thefollowing formula is used:Sales contributedTotalSales by revenue sourcesalespercentageFor Exhibit 3.8 the calculations are: 80,000 100,000Food salesTotal sales 80%Sales percentageAnd 20,000 Beverage sales 100,000Total sales 20%Sales percentage62M03 NRA5241 01 SE C03.indd 6206/06/12 5:41 PM
Note that the sum of the sales percentages for all revenue sources willalways equal 100%. In this example:80% 20% Food salesBeverage salesfor BusessinOpenThe Income Statement FormatManager’s MathIlze operates her own bakery.She sells breads, cakes, and cookies. Ilzehas prepared her January incomestatement and wants to include the salespercentage generated by each of thesethree revenue sources.100%Total salesManagers are often interested in sales percentage figures because ithelps them better understand the popularity of various sources fromwhich their revenue is generated.Ilze’s Bakery Sales: January This YearTo illustrate, consider the manager whose operation offers deliveryservice. As a result, Delivered Meals is designated as a revenue sourcewhen the operation’s income statement is prepared. In the first monthsof offering the service, the sales percentage for Delivered Meals wasvery low; less than 5 percent. However, it has increased each month. Asthe manager continually monitors the sales percentage for DeliveredMeals he or she will have a better understanding of the proportion ofsales that can be attributed directly to this new service.SalesPercentageSalesBreadCakesCookiesTotal Sales 36,00018,0006,000%100%1. What was the total amount of salesgenerated by Ilze’s bakery in January?Accounting for Expenses2. What was the sales percentagecontributed by bread sales?Cost of sales is the industry term for the food and beverage productexpense incurred in the generation of sales. For example, if anoperation generated 5,000 in food revenue and the
an income statement. identify operating costs as controllable, noncontrollable, fixed, variable, or semivariable. explain how managers read and analyze an income statement. inside this Chapter the importance of income statements the income statement Format reading the income statement 3 Income Statements (P&Ls)
Income Tax Act 2007 2007 No 97 BC 6 Income tax liability of filing taxpayer 106 BC 7 Income tax liability of person with schedular income 106 BC 8 Satisfaction of income tax liability 108 Subpart BD—Income, deductions, and timing BD 1 Income, exempt income, excluded income, non- 108 residents' foreign-sourced income, and assessable income
Annual Financial Statements for the year ended 30 June 2020 Contents Report of the Audit Committee Page Certificate of the Company Secretary 3 Directors’ report 5 Independent auditors’ report 6 Income statements 7 Statements of comprehensive income 9 Statements of financial position 9 Statements of cha
total income. Use the Family Income Statement form on page 2 to begin writing your income statement. An accurate income statement requires some homework. You may be able to use last year’s income tax records to estimate your current total income. Paycheck stubs, broker state ments and ch
Overview of the Financial Statements The Village's basic financial statements are comprised of three components: 1) entity-wide financial statements; 2) fund financial statements; and 3) notes to the basic financial statements. This report also contains supplementary information in addition to the basic financial statements themselves.
2.7 Statements 2.7.1 Expression Statements and Compound Statements Expression Statement: Similar to C, classical statements are expression statements. Compound Statement: A group of statements could be chained back to back, but only when expected by conditional statements if, while or for. Collectively we can refer those as statement lists.
AREA MEDIAN INCOME (AMI): The median family income in the metropolitan or nonmetropolitan area EXTREMELY LOW-INCOME (ELI): Households with income at or below the Poverty Guideline or 30% of AMI, whichever is higher VERY LOW-INCOME (VLI): Households with income between ELI and 50% of AMI LOW-INCOME (LI): Households with incomes between 51% and .
Adjustments to Income 17-1 Adjustments to Income Introduction This lesson covers the Adjustments to Income section of Form 1040, Schedule 1. Taxpayers can subtract certain expenses, payments, contributions, fees, etc. from their total income. The adjustments, subtracted from total income on Form 1040, establish the adjusted gross income (AGI).
8 DNA, genes, and protein synthesis Exam-style questions. AQA Biology . ii. Suggest why high humidity is used in theinvestigation. (1 mark) b . The larva eats voraciously but the pupa does not feed. The cells inside the pupa start to break down the larval tissues and form the adult tissues. The larval tissue and adult tissue contain different proteins. The genes in the cells of the larva are .
