Self-Employment Steps for Vocational Rehabilitation Counselors: Helping a Consumer Start a Business

Chapter 6:

The Income Statement

The income statement shows a business's financial activity over a period of time to determine if the business made or lost money. It matches expenses with business revenues. The Income Statement includes total sales, cost of goods sold, gross profit, indirect expenses, other expenses, pre-tax profit or loss, taxes, and net profit or loss. Each component is explained below.

Sales - Most financial planning begins with projecting sales - some experts think that it is the most difficult financial projection to make. Sales projections are an estimate of the amount of sales the business will make. The business owner does not work backward from costs to determine the amount of sales needed to make a profit. Sales projections are derived from market research and must be justifiable. A consumer should provide you with the assumptions on which he or she based the sales projections. Unfortunately, many people never get beyond this point of their business plan. 

Sales may be calculated in various ways. The consumer can get sales figures from similar businesses in non-competing locations, from industry publications that outline average sales, or from a former owner's records (if purchasing an existing business). Other calculations rely on a per-square-foot basis for a geographic location, or on an estimate of market share.

Cost of Goods Sold - This is subtracted from Total Sales. This is one of the easiest projections to calculate for retail, wholesale, or manufacturing businesses. The business owner simply determines how much it costs to produce, acquire, or create the projected sales. It is important to include all expenses in this category. A retail business would include the cost of shopping bags and packing boxes. A manufacturing business would include all the costs of raw materials, labor, and manufactured items needed to manufacture one item. A service business would include expenses for directly providing the service. 

Total Sales - Cost of Goods Sold = Gross Profit

Operating Expenses - These include rent, telephone, utilities, salaries and payroll taxes, advertising, insurance, office supplies, repairs and maintenance, and depreciation. Other expenses that occur whether or not a product or service is sold may also qualify. They are fairly easy to estimate, but the consumer should provide justification for these as well.

Other Expenses - This usually is interest.

Taxes - Although not necessary, especially if the business owner understands and can correctly figure taxes owed, most businesses - even very small ones - hire an accountant to determine the taxes owed on pre-tax profit. 

Net Profit or Loss - This is what is left over - it reveals whether the business is profitable. It is OK for a business to be unprofitable for a year or more as long as it has the cash or income to continue. Although a business is not making a profit, its owner may take a personal draw and have an income. However a business that does not look good on paper probably will not be successful after it opens either.

A business owner can increase his or her net profit by increasing gross profit, by decreasing expenses, or by doing both at once. 

Figure 10: Income Statement

Income Statement, Jan. 1 through Dec. 31, 1998
Total Sales
Cost of Services/Goods Avail./Sold

Beginning Inventory







Cost of Goods Avail. for Sale
Less Ending Inventory
Gross Profit  

Salaries & Wages


Payroll Taxes & Benefits






Advertising & Promotion


Office Supplies






Professional Fees (accounting, legal)





Other Expenses

Interest Expense

Total Operating Expenses
Pre-Tax Profit (Loss)


Net Profits (Loss)


Chapter 6 Business Plan Study Guide: Income Statement

  1. An Income Statement shows actual or projects a business's profit or loss over a period of time. T_____ F _____ 

  2. The beginning point for most financial planning is to project ___________. 

  3. The best way to project sales is to determine the cost of a product or service and work backward to project the amount of sales needed to make a profit. 
    T_____ F_____ 

  4. Sales are projected by conducting __________________________.

  5. Sales projections must be ___________________ and the consumer should provide you with the (assumptions/resources) he or she used to determine the projected sales.

  6. When determining Cost of Goods Sold, include (all expenses/as many expenses as possible) in the calculations. 

  7. Gross profit is the amount of Total Sales left over after subtracting the costs of producing, acquiring, or creating the projected sales from Total Sales. 
    T_____ F_____ 

  8. Operating Expenses are different that Cost of Goods Sold because they are expenses that are incurred whether or not a product or service is sold.
    T_____ F_____ 

  9. On an Income Statement, Net Profit/Loss - the amount that is left over after subtracting all other expenses from Total Sales - shows whether the business (was profitable/has cash left).

  10. A magazine advertisement is an example of a(n) (variable/operating) expense.

Study Guide Answers: Chapter 6 - The Income Statement

July 1998, 1st Revision June 1999, 2nd Revision February 2001