Topic:Financial Accounting for The Bissett eBay Challenge
From SharedExperienceProject
Contents |
Topic Highlights
(What you will learn)
- The importance of keeping track of the money in your entrepreneurial enterprise
- An understanding of the key terms used in the development of an Income Statement
- How to develop and format an Income Statement
- How to draw conclusions about the success of your entrepreneurial enterprise through the use of key profitablity ratios and management notes to the Income Statement
Introduction and Motivation
(Why learn it)
Not all students enrolled in the eBay challenge will have had previous exposure to financial and accounting concepts. A key deliverable for the Bissett eBay Challenge is the development of a team Income Statement. The goals of this topic are to outline expectations for this critical project deliverable and to provide an overview of the basics of creating an Income Statement[1].
There are a number of key success factors upon which any organization must focus to ensure its viability and sustainability. These include the identification of the right market and product or service for that market; building and managing a team; and finding your start-up capital to name a few. It should be emphasized that from an entrepreneurial perspective "cash is king" and the focus needs to be on the cash position of the organization. Therefore, the cash flow and projected cash flow statements are the most important financial statements in managing your venture.
The income statement also plays a vital role in managing the performance of your venture; not having one would be equivalent to driving a car with the windshield painted black and no rearview mirror. Eventually, the venture would bump into something nasty, and there will be no air bags.
Learning Activities
(How the levels of understanding will be gained)
| Type | Name | Direction |
| Lecture | Name and link | Instructor-directed |
| Reading |
| Self-directed |
| Personal activities |
| Self-directed |
Learning Objectives
(Levels of understanding to be gained)
| Level of Understanding | Objective(s) (presented as self-assessment questions) |
| Very best |
|
| Highly satisfactory |
|
| Satisfactory |
|
| Maybe just enough to pass |
|
Topic Notes: Basics of an Income Statement
What Is an Income Statement?
An income statement is an itemized statement of sales (or revenues) and the corresponding expenses that were incurred in generating those sales. A company's income statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period. It also accounts for the effects of some basic accounting principles such as depreciation. (ameritrade.com)
Key Definitions
Cost of Goods Sold (COGS)
Cost of goods sold is the cost of materials or variable costs that are associated with your venture's revenue for a specific period of time. The calculation is based on the following equation:
inventoryend = inventorystart + purchases - COGS
which can be rearranged as follows:
COGS = inventorystart + purchases - inventoryend
where:
- COGS is the cost of the goods sold
- inventorystart is your opening inventory
- purchases is the money spent on purchases in the period
- inventoryend is your closing inventory
Note that because you are starting a new venture with the eBay challenge your team will have no opening inventory. The project also forces you to only accept product (purchases on a consignment basis) and to close out all activities by the end of the project.
Example
Check out the following example, in which the above concept has been applied. Can you do this on your own?
| Solution |
 |
Gross profit
Gross Profit is your total sales less your cost of goods sold. You can see an example of how this is expressed in the Net Income Statement example. The calculation is expressed as follows; Total Sales-Cost of Goods Sold = Gross Profit
Operating expenses
These costs do not normally depend on sales and at times are referred to as fixed costs. They will be incurred regardless of sales and are incurred in the day-to-day operations of your team's venture. For example if you had to rent space for the period of the project this would be included in your operting costs. You will have to pay this rent even if you have no sales. Can you properly identify costs for the project that fit this definition?
Other Expenses
In this section of the Income Statement you would include items that are not associated with the operations of the business. For example interest expense on loans and depreciation and amortization of assets would be included here.
Does your team have expenses that would fit into this category?
Net Profit (Before Taxes)
Net Profit (Before Taxes) is defined as your venture's gross profit less total operating costs and other expenses. It can be expresssed as follows:
Gross Profit-Total Operating Expenses-Other Expenses=Net Profit (Before Taxes)
Net Profit is NOT Cash
It is important to remember that Net Profit is not necessarily your cash position. Your cash position is represented in the Statement of Cash Flow. The Income Statement records your sales and expenses when they are incurred regardless of when you receive the money for your sales and when you pay for your expenses. For example in our income statement above we have incurred our advertising expense in December. That is we have actually sent the flyers out or had the ad run in the newspaper. However we haven’t paid for these items yet as our suppliers have extended payment terms so we don’t have to pay until January. Our cash position is therefore $300.00 higher than our Net Income.
This is a simple example, however you should be able to discuss the concepts.
Example Net Income Statement
Topic Notes: Key Income Statement Ratios
Profit Margin
There are a number of key Income Statement Ratios that you could use to determine how healthy your business is and how it compares to similar businesses in your industry. You need to only focus on one of these ratios for the challenge, Gross Profit Margin. Your team could apply this ratio at different levels. At the highest level it could be calculated for all transactions for the challenge period. You could also go to the very lowest level of detail and calculate on each transaction or move up a level and calculate it by category of item you are selling.
The ratio is Gross Profit Margin equals gross profit divided by total sales
Gross Profit Margin = Gross Profit / Total Sales
Example Gross Profit Margin
Using the information from our Income Statement above, the Gross Profit Margin is calculated as follows
Gross Profit $3000
Sales $20,0000
Gross Profit Margin: 3000/20000= 0.15
You could also express it as a % by multiplying the number by 100%: 0.15 x 100%=15%
This page is part of The Bissett eBay Challenge.
