# Analyzing an Income Statement

OMM 622 Week 3 discussion 1 and 2

What are the two causes of an increasing or decreasing sales number?

Discuss all the reasons that might explain an increase or decrease in gross profit.

Some of the main reasons profits decrease, is the quality of product is not good, bad customer service, sometimes it can be a seasonal reason depending on the product. To make money in a business you have to have a “need” for a product, then make a “quality” product, and make sure to “price” that product at a fair price. Without these things your sales profit will decrease.(Amanda McMullen, Demand Media)

To increase sales, you first want to advertise and try and get new customers in. Offer a discount or some sort of an incentive for first time customers. Always offer great customer service so customers keep coming back, increasing your sales. The best way to increase sales is to have extensive knowledge about what you are trying to sell. Believing in the product or item that you are selling will also help. To increase sales make sure your customer are happy. The best advertising you can get is when a happy customers tells someone about your service.

Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation’s profit performance for the period.  Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement? What are the causes and effects of Elf’s performance for those three years?

Elf Corporation Income Statements for the Years Ending December 31

 (in millions) 2010 2009 2008 Sales \$700 \$650 \$550 Cost of goods sold 350 325 275 Gross profit 350 325 275 Operating Expenses: Administrative 100 100 100 Advertising and marketing 50 75 75 Operating profit \$200 \$150 \$100 Interest expense 70 50 30 Earnings before tax \$130 \$100 \$ 70 Tax expense (50%) 65 50 35 Net income \$   65 \$   50 \$   35

Write a one-paragraph analysis of Elf Corporation’s profit performance for the period.

It looks like the profits have increased over the time periods. The profit increase can be due to the increase in the advertising budget. The net income has almost doubled over the 3 year time span. From the chart it looks like the cost of goods sold and gross profit are the same.

Elf Corporation Income Statements for the Years Ending December 31

 (in millions) 2010 2009 2008 Sales 100% 100% 100% Cost of goods sold 50% 50% 50% Gross profit 50% 50% % Operating Expenses: Administrative 14.3% 15.4% 18.2% Advertising and marketing 7% 11.5% 13.5% Operating profit 28.6 23 18.2 Interest expense 10% 8% 6% Earnings before tax 19% 15.4% 12.7% Tax expense (50%) 9% 8 6.4 Net income