🥳 GOSKILLS TURNS 10: Get 10 days of free access with code 10YEARS

GoSkills
Help Sign up Share
Back to course

Earnings Statement Part 2

Quiz me Quiz Compact player layout Large player layout
Focus video player for keyboard shortcuts
Auto
  • 720p
  • 540p
  • 360p
1.00x
  • 0.50x
  • 0.75x
  • 1.00x
  • 1.25x
  • 1.50x
  • 1.75x
  • 2.00x
cc

We hope you enjoyed this lesson.

Get the Finance for Operations Managers course for more great video tutorials.

Start free trial

Cool lesson, huh? Share it with your friends

Facebook Twitter LinkedIn WhatsApp Email

  • Lesson resourcesResources
  • Quick referenceReference
  • Transcript
  • Notes

About this lesson

The Earnings Statement is a financial report that shows business profitability over some time period.  This lesson will focus on the revenue portion of the Earnings Statement.

Exercise files

Download this lesson’s related exercise files.

Earnings Statement Part 2
186 KB
Earnings Statement Part 2 - Solution
59.7 KB

Quick reference

Earnings Statement Part 2

The Earnings Statement is a financial report that shows business profitability over some time period.  This module will focus on the revenue portion of the Earnings Statement.

When to Use Earnings Statements

The Earnings Statement is prepared for a time period typically a month, quarter, or year.  It shows the sales and expenses during that time and ultimately whether or not the company made money (profit) during that time.

Instructions

  • All financial transactions for a time period are accumulated and shown on the Earnings Statement.
  • The revenue transactions are placed in one category.
  • The expense or cost transactions are normally placed in multiple categories. 
  • After the expenses have been subtracted from the revenue, the remainder is called Earnings, Net Income or Profit
  • Revenue transactions are included if their timing attribute is within the period represented by the Earnings Statement.
    • If cash basis, the timing is based upon receiving payment for the sale.
    • If accrual basis, the timing is based upon the delivery of goods or services to a customer.
  • The total revenue is typically “net revenue” which would be the sales minus any discounts or sales incentives.
  • The total revenue will typically include any one-time special sources of revenue, such as selling intellectual property rights.
  • Total Revenue is often referred to as “Top Line” since it is the top line of the Earnings Statement.  When someone talks about “Top Line Growth” they are referring to increases in sales.
  • Most companies strive to maximize total revenues.  There are three ways to increase revenue:
    • Increase the number of items sold.
    • Increase the price of the items that are sold.
    • Reduce any discounts offered on the items that are sold.

 

Hints and Tips

  • All transactions are recorded either using the cash basis or the accrual basis – never mix these on a statement.
  • Companies may break their revenues into further subcategories to ease analysis.
Login to download
  • 00:02 >> Hi, I'm Ray Sheen.
  • 00:04 I'd like to continue talking about the earning statement.
  • 00:07 This time, I will focus on the income, or revenue side of the earning statement.
  • 00:13 A quick review.
  • 00:14 The earnings statement has revenue and expenses that occur over some time period.
  • 00:19 When the expenses are subtracted from the revenue what is left is the net income,
  • 00:24 earnings, profit or loss.
  • 00:26 Revenue is the money that we get from customers for selling products and
  • 00:30 services.
  • 00:31 This is the money coming into the business.
  • 00:33 It includes the money from selling all products and
  • 00:36 any services that are provided for sale.
  • 00:38 It includes both wholesale and retail sales by the company.
  • 00:42 Revenue could also include special one-time items,
  • 00:46 such as selling a building or a piece of equipment.
  • 00:48 But these are typically tracked as a special category of revenue,
  • 00:52 since they are not part of the primary business operation.
  • 00:56 Remembering that the earnings statement is always based upon a period of time,
  • 00:59 such as a month, quarter, or
  • 01:01 year, the revenues shown on the statement is that revenue for a period of time.
  • 01:07 In a business using the cash basis for
  • 01:09 accounting, the revenue is the money that is collected during that period.
  • 01:14 It literally means that amount of money that goes into the business account or
  • 01:17 cash register.
  • 01:19 For business using accrual basis, it is the amount of the invoices for
  • 01:23 products and services that are delivered to the customer during the time period.
  • 01:28 The customer may not yet have paid the bill, but the business still takes credit
  • 01:32 for the sale if they delivered the product or service.
  • 01:36 Let's dig a little deeper into the concept of total revenue.
  • 01:40 Total revenue is often referred to as the topline
  • 01:43 because it is at the top of the earning statement.
  • 01:46 When you hear people use the term, the top line, where that they had top line growth.
  • 01:50 They meant growth in sales and revenues.
  • 01:53 Since the top line is sales on the earning statement,
  • 01:55 it only makes sense that the bottom line is net income or profit.
  • 01:59 Another characteristic of total revenue is it is normally a net number.
  • 02:04 That means that any sales discounts, rebates, or
  • 02:06 coupons are subtracted from the sales price.
  • 02:09 These sales incentives are not treated as a cost in the operating expenses.
  • 02:14 This gives a truer picture of the amount of money that came in,
  • 02:16 and what the customer is really paying for the products or services.
  • 02:20 So total revenue is the sales price minus any sales incentives offered
  • 02:25 to customers at the time of sale.
  • 02:28 The last point I want to discuss is the strategy for increasing total revenue.
  • 02:32 These are operational strategies, not financial manipulation.
  • 02:36 Many times finance will ask if there's any way to increase total revenues.
  • 02:40 There are essentially three options open to you.
  • 02:43 First, and the most obvious,
  • 02:45 is to sell more stuff, more products or more services.
  • 02:49 The more you sell, the higher the revenue.
  • 02:52 Now how do you sell more?
  • 02:53 Well we'll probably take more advertising or sales efforts, and that can cost money.
  • 02:58 So be sure that you have the money for that extra effort.
  • 03:01 So lets say I sell 100 units a month with a list price of $100 and
  • 03:05 a sales rebate of 10%.
  • 03:07 That means the total revenue for the month is $9000.
  • 03:11 If I sell five more units, my total revenue increases to $9,450.
  • 03:19 Another option is to raise the price on what you already sell.
  • 03:22 Now, of course, there's always the price and demand curve to take into affect.
  • 03:26 If you raise the price, you may the lower the demand and
  • 03:29 ultimately have less total revenue, because you sell fewer units.
  • 03:33 By the same token, if you lower the price you may sell more and
  • 03:37 ultimately have higher total revenue because you sell more units.
  • 03:41 If instead of selling more units, I sell the same number but raise the price from
  • 03:45 $100 to $105, I will again have total revenues of $9450.
  • 03:52 Keep in mind, in some markets, the price is indicative of the quality, and
  • 03:56 can influence the buying decision.
  • 03:58 I have an acquaintance that developed a new medical device that was far superior
  • 04:02 to the equipment in use.
  • 04:04 His business was limping along with low sales.
  • 04:07 And he was contemplating going out of business.
  • 04:09 When one of his senior staff suggested that,
  • 04:11 before they do that, they raise the price dramatically, nearly doubling it.
  • 04:16 They almost immediately sold out and had an order backlog.
  • 04:20 It turns out that when the price went up, the hospitals and clinics looked at
  • 04:24 the device and realized it wasn't just another me too device on the market, but
  • 04:28 that it added tremendous value for them, and they gladly paid the higher price.
  • 04:33 The third option for raising total revenue is to reduce or
  • 04:37 eliminate the discounts and rebates.
  • 04:39 While this doesn't change the listed sales price,
  • 04:42 it does increase the effective sales price.
  • 04:44 So using our example of selling 100 units a month at a listed price of
  • 04:49 100% per unit and a rebate of 10%, if we change the rebate to only 5%,
  • 04:55 in this case the total revenues would now be $9,500.
  • 05:00 Total revenue is a fundamental element of managing operational finances.
  • 05:07 It's the top line of year end statement, and is something that you,
  • 05:09 as an operational manager, need to watch very closely.

Lesson notes are only available for subscribers.

Earnings Statement Part 1
04m:04s
Earnings Statement Part 3
05m:53s

PMI, PMP, CAPM and PMBOK are registered marks of the Project Management Institute, Inc.

Share this lesson and earn rewards

Facebook Twitter LinkedIn WhatsApp Email

Gift this course
Give feedback

How is your GoSkills experience?

I need help

Your feedback has been sent

Thank you

Back to the top

© 2023 GoSkills Ltd. Skills for career advancement