We've actually covered a lot of ground. Here's an example to help reiterate and clarify everything we've discussed about the income statement.
If the owner of an ice cream parlor purchased 10 gallons of vanilla ice cream for $2 per gallon, and sold each of those gallons to her customers for $5, the first three lines on her income statement would look something like this:
Total Revenue $50
(The total revenue is the amount of money rung up at the cash register. The owner sold 10 gallons of vanilla ice cream to her customers for $5 per gallon. 10 gallons x $5 a gallon = $50.)
Cost of Goods Sold $20
(The cost of goods sold was 10 gallons x $2 per gallon = $20)
Gross Profit $30
(The total revenue subtracted by the cost to earn that revenue is $30. Before taxes, and other expenses, this is the ice cream parlor's gross profit.)
Gross Margin: .6 (or 60%)
The gross margin of 60% means that for every $1 the company generates in sales, it is going to be left with $0.60. That sixty cents must be enough to cover all of the other expenses such as payroll, rent, taxes, freezers, cash registers, aprons, security systems, and accounting fees, just to name a few, before the owner will receive any dividend income from the business. Those other expenses are known as operating expenses and that's what we're going to examine on the next page.
Next page > Operating expenses ... > Page 1, 2, 3, 4, 5, 6, 7, more >>
This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.
