What is an income statement? What can one learn about a company from its income statement? This second article in the series will review and examine the income statement on a stand-alone basis. Subsequent articles will evaluate a company by analyzing its balance sheet, income statement and cash flow statement in aggregate. Much of what can be learned about a company will come from a combination of analyses of these reports.

An important difference between the balance sheet and income statement is that the balance sheet reports a company's financial position at a certain point in time while the income statement reports a company's operating results over a period of time. For example, a company's year-end balance sheet presents a company's financial position as of December 31, whereas the income statement presents the results from January 1 through December 31. This will be a key distinction when performing analysis using both a company balance sheet and income statement. In the United States, companies issue income statements similar to balance sheets at the end of each quarter (10Q) and at the end of their fiscal year (10K). Outside of the US, annual or semiannual reporting is the general rule.

The income statement reports a company's revenues and expenses over a period of time. If revenues exceed expenses, the company has a net profit. If not, the company has a net loss. Revenues (sales) are defined as inflows resulting from the delivering or producing of goods or the rendering of services. Expenses are defined as outflows resulting from the receipt of goods or rendered services. One of the most important concepts of creating an income statement for a company is to ensure that the expenses are matched against the revenues - referred to as the "the matching principle." This principle's objective is to match expenses incurred during the period to revenues received.

Income statement accounts are temporary and reset at the beginning of a new period. For example, at the end of the year revenues are closed and the accounts are set back to zero whereas balance sheet accounts continue indefinitely during the life of the company. The income statement accounts become part of the retained earnings portion of the equity section of the balance sheet. When all income statements accounts are closed at the end of the period, the net addition to retained earnings will be the net income or net loss that resulted during the period. Please note that dividends declared and paid to shareholders are charged against retained earnings. As the account title communicates, retained earnings are earnings that are kept and reinvested in the company.

The income statement of an annual report or earnings release provides, on one page, a summary of how a company performed during a period. Examples of what it can show are:

1. Growth of company
   Investment analysts typically key in on two different growth measures, year-over-year and sequential. Year-over-year compares how a company did this period compared to the same period one year earlier. A sequential growth analysis would compare September quarterly revenues to the previous quarter, which ends in June. All of the above comparisons can be applied on annual numbers as well. One advantage of looking at year-over-year growth numbers is that one is comparing apples to apples. For example, a retailer's December quarter would be expected to be its best quarter, but comparing its December quarter to its March quarter would be comparing apples to oranges.



2. Profitability Analysis
   One typically is interested in four different profitability margins of a company: (1) gross margin = gross profit/sales, (2) operating margin = operating profit/sales, (3) pre-tax profit margin = pre-tax profit/sales and (4) net profit margin = net profit/sales. Gross profit, operating profit, pre-tax profit and net profit can be calculated using data found on an income statement. It is encouraged to analyze margin trends over time.

Essential Takeaways

1. Matching Principle's objective is to match expenses incurred during the period to receipt of revenues.
   
2. Income statement communicates to financial statement users the operating results of a company.

“What is the difference between NAIC Classic Plus and other NAIC software?”

Since the launch of NAIC Classic Plus a couple weeks ago, we’ve gotten a lot of inquiries from people confused about the differences between NAIC Classic Plus and other NAIC Software products.

"How do I move my club's copy of NAIC Club Accounting version 2 to a different computer?" is one of the more frequent questions posed to our customer service reps, and the solution is easy. Just follow the steps below, and you should be up and running in no time at all. (Note that this procedure applies to NAIC Club Accounting version 2 for Windows, or "NCA 2".)

Step 1: Preparation

The best time to move the software to a new computer is after all transactions for the month have been completed and you have run a valuation. This way the information you are about to move to another computer is easily verifiable by comparing the monthly reports after the process is complete.

After you have closed the month, run the Member Valuation Report and the Member Status Report. These reports will give you figures to compare once you have completed the new installation to insure the data was correctly transferred.

Also, be sure to write down your NCA 2 serial number (which you can find on the back of your software manual) and have it handy to complete the installation. You will need it to activate the software on the new computer.

Step 2: Export Your Club Data

Place a formatted floppy disk in your A: drive. In the accounting area of NCA 2, push the 'Utilities' button. There will be a selection in the main area called 'Export'. Choose this and select 'Export to floppy disk'. Your data file (with an extension of .icd) will be placed on the floppy in the A: drive.

Special Note for NAIC On-line Club Accounting (NOCA) Users: You may simply import your data into NOCA using the usual method under 'Utilities', and then proceed.

After you have completed this, gather all the information in one place--serial numbers, floppy disk (if not using NOCA for the transfer), manuals, and reports to verify the installation--and take them with you to the new location.

Step 3: Prepare your new installation of NCA2

ICLUBcentral releases updates to the software from time to time. It is always best to get the latest version of the software, especially if you are setting up a new installation. There are two ways you can accomplish this: