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Case Study: Income Statement

Case Study: Income Statement

Author: Evan McLaughlin

Calculate the net profit or loss for a hypothetical business.

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Hey everyone, and welcome to our video today, a case study on the income statement. So what's today's video about? Well, we're going to talk about a subject company, which is Legacy Realty. We're going to find out a little bit about that company. Then we're going to talk about our company and the income statement. So why does our company need an income statement? And then we're going to go through a case study on the income statement for this company.

So let's talk about Legacy Realty a little bit. What type of company is it? Well, it's a sole proprietorship. That's a type of company that is owned by a single individual, or the individual and the business are legally treated as the same.

What does the company do? The company owns rental properties, leases them and manages them. So they purchase their own houses and condominiums and lease them out to tenants. So they perform their own management of the units, repairs, and maintenance, and collect rent.

So where's our office located? It's in Washington, DC. And we do have a small staff of five people.

So continuing with this, does our company really need an income statement? What do you think? Of course they do. Well, why do we need an income statement? Well, the income statement tells us about our business's profitability. It tells us about the health or strength of the business.

So the income statement will tell us, over one year or less of activity, how profitable we are and how strong we are as a business. Which is important, as we analyze the inflows and outflows within our business, which is important information for potential investors, for banks, as well as for owners themselves.

So where do we start when we need to prepare our income statement? Well, we start with the trial balance worksheet. So let's take a look at the trial balance worksheet. And specifically, we're going to need to get to our adjusted trial balance. So let's take a look at that right now.

OK, everyone. So we're here on our trial balance worksheet. And what we've done so far is that we've prepared our trial balance, the listing of all of our general ledger accounts, as well as their corresponding debit and credit balances. And now we've also prepared our adjustments and our adjustment explanations. So we've made corrections to our accounts to match our revenues and expenses with the correct period. We've also had to correct any errors or omissions that we may have made.

So we've prepared our trial balance, made our adjustments. And now we can prepare our adjusted trial balance, which is our trial balance, and then we account for all those adjustments that we need to make to get us to our adjusted trial balance. Which, just as the trial balance is, it's a listing of all of our general ledger accounts, as well as the corresponding debit or credit balance within that account.

And this adjusted trial balance, this is going to be the source for our financial statements. This is what we're going to use to create those. So let's take this, take this information for Legacy Realty, this adjusted trial balance, and let's go on to the next step.

Great. Now that we've got our adjusted trial balance, we can begin to prepare our income statement. So let's go ahead and dive right in. The first part of our income statement is our heading. So we're going to put our business's name, Legacy Realty Partners, income statement for the period ending December 31, 2012. That's an important piece of our income statement that we indicate for the period ending.

So here's our adjusted trial balance and all the information that we're going to need to prepare our income statement. So which accounts do you think we need? Do we need all these accounts? No, we don't need the permanent accounts, our assets, liabilities, and equity. All we need are our revenue and expense accounts, which are our temporary accounts.

So starting with our revenue, then we're going to have operating expenses. So we're going to list our salaries expense, repairs, advertising, rent, insurance, supplies, and depreciation. So that gives us our total operating expenses. And then we have a subtotal of what we call our income from operations.

So this is our operating income. And then we have these other revenue or expense items, which in this case is just our interest expense piece. So we take our interest expense, take it out of our income from operations, to get to our total net income. So that's what the income statement looks like for Legacy Realty Partners. It's just our temporary accounts, but we have to start with that adjusted trial balance.

So let's bring it home. In a nutshell, today we discussed our case study company, Legacy Realty. We learned a little bit about them. And then we looked at why they need an income statement, and then walked through an example of preparing an income statement for this company. We started with our adjusted trial balance. We took our revenue and expense accounts and created our income statement. I hope everybody enjoyed this video, and I hope to see you next time.