Understanding Financial Statements

Let's say that during your first month, you sell one hundred play packs. Not bad, you say to yourself, but did I make a profit? To find out, you prepare an income statement showing revenues, or sales, and expenses - the costs of doing business. You divide your expenses into two categories:

• Cost of goods sold: the total cost of the goods that you've sold
• Operating expenses: the costs of operating your business except for the costs of things that you've sold

Now you need to do a little subtracting:

1. The positive difference between sales and cost of goods sold is your gross profit or gross margin.
2. The positive difference between gross profit and operating expenses is your net income or profit, which is the proverbial "bottom line". (If this difference is negative, you took a loss instead of making a profit.)

Figure 12.5 "Income Statement for Stress-Buster Company" is your income statement for the first month. (Remember that we've made things simpler by handling everything in cash).

Figure 12.5 Income Statement for Stress-Buster Company