Friday, August 2, 2013

Instructions: How to Approach the Income Statement




Cash Trade Fair Sales (net)
Trade Fair Sales on Account (net)
Sales to Non-VE Customers (net)
All Other Sales
TOTAL SALES
Cost of Goods Sold or Services Provided
Gross Profit
Salaries
Payroll Tax
Rent
Utilities
Advertising

Insurance
Interest
Depreciation
Supplies
401(k)
Other Operating Expenses
TOTAL OPERATING EXPENSES
Income from Operations
Other Gains/Losses
Corporate Tax
Net Income After Tax

Cash Trade Fair Sales
These are sales that were made via checks that were received during the trade fair. In order to verify this amount, the amount that was sent from VEC Trade Fair Account to your firm is the Cash Trade Fair Sales. If your firm attended multiple trade fairs, add the amounts that were sent from VEC Trade Fair Account.
                          Common Mistakes 
·         Reporting an amount higher than what was sent through VEC Trade Fair Account due to the inclusion of sales that were made through the firm’s bank account.
Tips
·         DO NOT include any other trade fair sales that were not sent from VEC Trade Fair Account.

Trade Fair Sales on Account
These are sales that were made by VE students or firms and were sent directly from them.  DO NOT mistake them with Cash Trade Fair Sales.

Sales to Non-VE Customers
These are sales that were made to customers that are outside of VE.

All Other Sales
These are sales that are NOT related to the trade fair or outside customers. This can include, but not limited to sales made via website or email.

Total Sales
These are Cash Trade Fair Sales + Trade Fair Sales on Account + Sales to Non-VE Customers + All Other Sales.
                          Common Mistakes
·         Miscalculations. Be sure to check the addition of these numbers multiple times for accuracy.

Cost of Goods Sold or Services Provided
This is the amount that it cost to provide your firm’s good or service to customers. This should also be reported on your firm’s Wholesale Market Place account.
Tips
·         Cost of Goods or Services can be determined by looking up the wholesale prices of the products your firm is selling. Once this wholesale price is determined, it is IMPORTANT that your firm purchase the amount of products you projected to sell with the price that you have found them for on Wholesale Market Place. The total of these amounts should be your Cost of Goods or Services, which should be paid to VEC Trading.
o   If your firm exceeds the amount of products sold in comparison to what you have purchased, make sure to purchase more goods and make another payment to VEC Trading.
·         Be sure to USE Wholesale Market Place and make payments to VEC Trading. Although all firms are virtual firms, it is important that Cost of Goods or Services are paid for and are not in existence without even paying for the goods.
Common Mistakes
·         Amount on Wholesale Market Place does not match the payment that was made to VEC Trading.
·         Not paying for the goods bought on Wholesale Market Place to VEC Trading or not paying at all.

Gross Profit
This is Total Sales - Cost of Goods or Services Provided.
Common Mistakes
·         Miscalculations. Be sure to check the addition of these numbers multiple times for accuracy.

Salaries
This is the amount that employees are being paid for the fiscal year.

Payroll Tax
Salaries x 7.65% is equal to your firm’s Payroll Tax for the year.
                Common Mistakes
·         Multiplying with a different payroll tax rate.

Rent
Rent is the amount that your firm pays to occupy the space that your firm works in. During the beginning of every year, the room of every VE firm is measured by square foot and sent to another firm to determine what the Rent would be for the firm. Once this amount is determined, the firm as a whole decides whether they would like to make 8 payments for Rent or 12 payments. Some firms choose 8 payments because those are the only months that school is in session for students to pay the Rent. Other firms choose 12 payments and create a recurring transaction in order for their bank to continuously make the Rent payments. BUT regardless of whether or not these payments are made, your firm must report the TOTAL Rent for the fiscal year.
·         Example: A firm decides to make a Rent payment of $3450 every month for 8 months. During the month of May, they did not make a payment. Although the payment has not been made, it is still an expense for the first and MUST still be reported as a part of rent.
Tips
·         Keep track of the payments that your firm makes each month. To avoid missing a payment, have a recurring transaction for Rent paid to VEC Realty. (If your firm chose to pay in 8 months, make sure that the recurring transaction is disabled at the end of the eighth month. If your firm chose to pay in 12 months, make sure the recurring transaction still continues).
Common Mistakes
·         Reporting the amount that was paid for the year rather than what was expensed for the year.

Utilities
Utilities consist of the amount your firm pays for electricity, heat, etc. in order to keep the firm in operation. During the eight months that your business is operating, your firm must make a payment of $593.75 to VEC Utilities each month. Regardless of whether these payments are made or not, your firm must STILL report the total amount for what should have been paid for the year. If the cost for Utilities each month is $593.75, then the TOTAL cost for eight months would be $4750. (Note: If the monthly charges for Utilities decreases or increase during another year, the TOTAL amount for that year will be different as well.)
Tips
·         Keep track of the payments that your firm makes each month. To avoid missing a payment, have a recurring transaction for rent paid to VEC Utilities. (At the end of the school year, make sure it is disabled to prevent payments from being made during the summer).
Common Mistakes
·         Reporting the amount that was paid for the year rather than what was expensed for the year.

Advertising
This is the amount that has been paid to advertising firms to create ads or advertise for your firm.

Insurance
This amount is a payment made to ensure any damages that may occur in your firm.

Interest
This is the amount of the charge that results from the privilege of borrowing money.
                Tips
·         The best way to determine what your firm’s Interest is to use the Loan Payment Table. Based on your firm’s consistent or inconsistent payments, the Interest may vary. Regardless of the exact amount of payments that have been made, Interest will be different if a payment was missed during one month and paid during another month.
·         DO NOT send a payment to VEC Bank during a new month and state that it is for prior month(s). The new payment does not account for the missed payment. Interest has already accumulated, so the payment should include the missed payment and extra Interest added as well if your firm wants to successfully pay off the loan in five years.

Loan Payment Table
2012-2013
Report Date
Beginning Balance
Interest
Adjusted Balance
Payment
End Balance
1-May-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Jun-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Jul-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Aug-12
 $                     -  
 $            -  
 $                   -  
 $           -   
 $              -  
1-Sep-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Oct-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Nov-12
 $        350,000.00
 $  1,385.42
 $      351,385.42
 $  6,500.68
 $ 344,884.74
1-Dec-12
 $        344,884.74
 $  1,365.17
 $      346,249.91
 $  6,500.68
 $ 339,749.23
1-Jan-13
 $        339,749.23
 $  1,344.84
 $      341,094.07
 $  6,500.68
 $ 334,593.39
1-Feb-13
 $        334,593.39
 $  1,324.43
 $      335,917.82
 $  6,500.68
 $ 329,417.14
1-Mar-13
 $        329,417.14
 $  1,303.94
 $      330,721.08
 $  6,500.68
 $ 324,220.40
1-Apr-13
 $        324,220.40
 $  1,283.37
 $      325,503.77
 $  6,500.68
 $ 319,003.09
Total

 $  8,007.17

 $39,004.08
 $ 319,003.09

This is an example of a loan payment table that has made consistent monthly payments.

Loan Payment Table      
2012-2013
Report Date
Beginning Balance
Interest
Adjusted Balance
Payment
End Balance
1-May-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Jun-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Jul-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Aug-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Sep-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Oct-12
 $                     -  
 $            -  
 $                   -  
 $           -  
 $              -  
1-Nov-12
 $        350,000.00
 $  1,385.42
 $      351,385.42
 $  6,500.68
 $ 344,884.74
1-Dec-12
 $        344,884.74
 $  1,365.17
 $      346,249.91
 $  6,500.68
 $ 339,749.23
1-Jan-13
 $        339,749.23
 $  1,344.84
 $      341,094.07
 $           -  
 $ 341,094.07
1-Feb-13
 $        341,094.07
 $  1,350.16
 $      342,444.23
 $ 13,001.36
 $ 329,442.87
1-Mar-13
 $        329,442.87
 $  1,304.04
 $      330,746.91
 $  6,500.68
 $ 324,246.23
1-Apr-13
 $        324,246.23
 $  1,283.47
 $      325,529.71
 $  6,500.68
 $ 319,029.03
Total

 $  8,033.11

 $39,004.08
 $ 319,029.03

This is the same loan, but one missed payment in January resulted in a different end balance and Interest although two payments in February were made to account for the missed payment. This also generated a new Interest amount, so firms must be sure to pay off the extra Interest accumulated in order to pay off the loan in five years. (To prevent any miscalculations from occurring, it is better to continuously send payments EVERY month).

Depreciation
This is the amount of decrease of an asset’s value due to market conditions. An asset is believed to have value for up to five years.
                Tips
·         To determine Depreciation, divide the total cost of the asset by five and that is the Depreciation for the first year.
o   Example: A firm has assets of up to $25000. The first year the Depreciation of the assets would be $5000, the next year $10000, the next $15000, the next $20000, and the next $25000 where the asset has depreciated in total value and no longer considered an asset of value.
·         The amount of Depreciation in the Income statement should match the Less: Accumulated Depreciation in the Balance Sheet. The only difference is that the Less: Accumulated Depreciation is reported as a negative number.

Supplies
This amount is the cost of the supplies of your firm.
                Common Mistakes
·         DO NOT report $0 as the Supplies expense. EVERY firm has supplies in the office, otherwise the firm would be unable to function. Even if your firm did not buy any new Supplies for the year, Supplies of prior years are counted.

401(k)
This is amount that the firm has matched for employees who decided to enroll in a 401(k) plan. If your firm chose not to enroll in a 401(k) plan or not to match your employees, then the 401(k) amount should be $0.

Other Operating Expenses
These are other expenses that your firm may have incurred during the year. If no other expenses were incurred, then the amount should be $0.

Total Operating Expenses
This is Salaries + Payroll Tax +Rent + Utilities + Advertising + Insurance + Interest + Depreciation + Supplies + 401(k) + Other Operating Expenses.
Common Mistakes
·         Miscalculations. Be sure to check the addition of these numbers multiple times for accuracy.

Income from Operations
This is Gross Profit Total Operating Expenses.
Common Mistakes
·         Miscalculations. Be sure to check the addition of these numbers multiple times for accuracy.

Other Gains/Losses
Other gains/losses are gains or losses that are not related to primary business operations. If a firm has both gains and losses, subtract the losses from the gains. If the firm has no gains/losses, then this amount should be $0.

Corporate Tax
This is the amount a firm is taxed IF profits were made.
·         If the firm generated no Income from Operations, then the Corporate Tax will be $0.
·         If the firm generated an Income from Operations, then the Corporate Tax should be calculated.
Corporate Tax is taxed at different rate depending on how much a firm is profiting. Firms that are less profitable will be taxed less in comparison to firms that are more profitable.
Corporate Tax Rates
Income from Operations
Percentage Taxed
$1 - $50000
15%
$50000 - $75000
25%
$75000 - $100000
34%
$100,000 - $335000
39%

Example: A firm’s Income from Operations for the year $223500. The Corporate Tax calculation for this amount is as follows:

($50000 x 15%) + ($25000 x 25%) + ($25000 x 34%) + ($123500 x 39%) =

       ($7500)       +        ($6250)         +       ($8500)        +        ($48165)        =        $70415

In this example, the Corporate Tax for the year is $70415. The first $50000 of income was taxed at 15%, the next $25000 was taxed at 25%, the next $25000 was taxed at 34%, and the remaining $123500 was taxed at 39%.

Net Income after Tax
This is Income from Operations – Other Gains/Losses – Corporate Tax.





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