Uses of the Income statement
The income statement refers to the summary of the loss or profits of an entity over a given period in time (Macfee, 2019) . The statement records all the expenses and the revenues of a given period in time. According to Macfee (2019), the income statement is used by business owners to determine the expenses and revenues of a company over a given period in time so as to determine the profitability or the performance of the organization. Small entities use the businesses to determine if the business is performing as budgeted or below the budget. The items that are causing the business can be identified from the income statement such as the operating expenses. The income statement also has the ability to identify the costs of goods sold
Components of the Income Statement
Sales
The sales amount in the income statement represents the revenue streams of the company. The amounts that are indicated in this component are the total revenues less the goods sold and returned.
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Cost of goods sold
The costs of goods sold section indicates the amounts that have been used in acquiring or manufacturing the products. The section records the opening inventory, purchases, carriage inwards. The sum total of the goods purchased and returned and the closing inventory is subtracted from the sum total of the amounts mentioned above to arrive at the costs of goods sold.
Gross profit
The gross profit is calculated by subtracting the costs of goods sold from the net sales.
Operating expenses
This are expenses that are incurred on the daily basis to ensure that the business is kept operational. The amounts recorded under this category include salaries and wages, depreciation and advertising expenses just to name a few.
Income before taxes
This is the sum total of all the expenses subtracted from the gross profit
Net income
Refers to the income before taxes less the taxes.
Income statement for the year 2019
Dehew Healthcare System |
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Income Statement |
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For the year Ended 2019 |
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| Total net revenues | 13964346 |
| Total expenses | 10871020 |
| Net Income | 3093326 |
The company made profits in the year 2019.
Contribution Margin
Total Contribution Margin |
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| Net Sales | 13964346 |
| Less Variable costs | |
| Supply expenses | 81930 |
| postage/courier services | 2462 |
| repair and maintenance | 1865 |
| travel/seminar | 38209 |
| Equipment rentals | 5957 |
| supplies | 41227 |
| Total Variable Costs | 171650 |
| Contribution Margin | 13792696 |
5) The contribution margin indicates how a particular product contributes to the profitability of an organization. The calculation of the contribution margin begins by identifying the sales generated by a particular product before subtracting any variable costs that have been incurred. The sales generated indicate the performance of a product and its overall contribution to the profits of the company.
The contribution margin also indicates the portion of the sales that can be used to cover the fixed costs. The calculation of the contribution margin is arrived at after determining the variable cost and subtracting them from the net sales of the company. The remaining portion of the sales are used to cover the fixed costs. In the event that the fixed costs are higher compared to the contribution margin then the organization can adjust either the selling price or the variable costs to ensure that the company is profitable in the long run.
The contribution margin helps the company set the selling price of the product. The separation of the fixed and the variable costs helps an organization set the selling price of a product. Fixed costs are not under the control of the organization but the company can control the variable costs. understanding the contribution margin enables the company to set the price at which the company without making a loss.
Break Even Analysis
Break even analysis is an analysis that is done by organizations to determine the number of units that a company must sell in order to cover the variable and fixed costs that have been used in the production process. The break-even analysis is important for an organization to determine if it is viable to continue producing or selling a given product with the current costs. The determination of the contribution margin allows an organization to set the price or adjust variable costs to ensure that the entity is profitable in the long run.
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Profit Statement |
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| Net Sales | 13964346 |
| Less Variable costs | |
| Supply expenses | 81930 |
| postage/courier services | 2462 |
| repair and maintenance | 1865 |
| travel/seminar | 38209 |
| Equipment rentals | 5957 |
| supplies | 41227 |
| Total Variable Costs | 171650 |
| Contribution Margin | 13792696 |
| Less Fixed costs | |
| salaries and wages | 8925000 |
| employee benefit expenses | 290000 |
| purchased services | 18701 |
| purchased outside services | 15598 |
| Facilities Expenses | 461017 |
| other operating expenses | 277264 |
| intersystem allocation | 750000 |
| Total fixed costs | 10737580 |
| profit | 3055116 |
Fee For Service Payment Model compared to the Income Statement
The Fee for service payment model is a system in which the healthcare providers are paid for the services that they provide (Kane, 2009) . This model introduces an incentive for healthcare providers to lay emphasis on the quantity of the healthcare services provided as opposed to the quality. The number of services provided determine the costs that are expensed by a company to pay off salaries (Kane, 2009) . The main difference between the break-even analysis method and the Fee For service method is that the break-even analysis method categories the costs into variable and fixed costs. The variable costs are driven by the number of activities. The Fixed costs in the breakeven analysis method are constant while the fee for service method does not identify fixed costs. in the year 2019 the healthcare facility identified salaries and wages in their income statements as fixed costs. The fee for services model allows the activity to drive the salaries and wages expense for healthcare providers. As a result of this the salaries in the fee for services payment model are variable and dependent on the activity level while in the income statement the salaries and wages are fixed at a predefined rate.
However, the income statement and the fee for payment model have some similarities also. The model allows expenses to be deducted from the revenues to arrive at the net income or loss of the organization. Even though the expenses are not separated in form of variable and fixed they are generally reduced from the net sales to arrive at the net income.
References
Kane, N. (2009). Traditional Fee-for-Service Medicare Payment Systems and Fragmented Patient Care: The Backdrop for Non–Operating Room Procedures and Anesthesia Services. Anesthesiology Clinics , 27 (1), 7-15. https://doi.org/10.1016/j.anclin.2008.10.009
Macfee, J. (2019). Income Statement vs. Comprehensive Income Statement. European Journal Of Business And Management . https://doi.org/10.7176/ejbm/11-35-05
Roberts, B. (1976). Break-even analysis: tool for budget planning. Social Work . https://doi.org/10.1093/sw/21.4.300
Vance, D. (2003). Financial analysis & decision making . McGraw-Hill.
