One business, three statements

From revenue to net income

Morrow Bikes' year is over. Customers paid or promised $100,000 for repairs and parts. Parts and mechanics' time cost $55,000. Rent, the front desk, insurance and the wear on the lift came to $25,000. The bank wanted $2,000 of interest and the tax authority wanted its share. The Scorecard (income statement) turns that year into one column of numbers, and the reflex it builds is the fourth question: what is the bridge from revenue to profit?

The Scorecard lists revenue, expenses, gains and losses for a period. You will also hear it called the statement of operations or the P&L. It is a film of the year, not a photo of December 31.

Morrow's simplified year

Revenue 100,000 − cost of sales 55,000 = gross profit of $45,000. Gross profit − operating expenses 25,000 = operating income of $20,000. Operating income − interest 2,000 = pretax income of 18,000. Pretax income − tax 4,500 = net income of $13,500. The tax is an assumed 25% of 18,000; tax rules are a separate rulebook, and this course uses made-up rates.

Each subtotal answers a different question. Gross profit asks whether the repairs themselves make money. Operating income asks whether the shop makes money after rent and staff. Net income asks what is left for the owners after the lender and the tax authority. Layout varies by industry and by rulebook, so read the line labels before you trust the subtotals.

Three margins from one column

Gross margin is 45,000 ÷ 100,000 = 45%. Operating margin is 20,000 ÷ 100,000 = 20%. Net margin is 13,500 ÷ 100,000 = 13.5%. Every margin divides by revenue; only the numerator changes.

What is missing from the Scorecard

During the year Morrow also repaid part of the loan and paid the owner a $5,000 dividend. Neither appears above. Repaying principal shrinks a liability; it is not an expense. A dividend hands part of the owners' claim back to them; it is not a cost of earning the year's income. Both show up on the Snapshot (balance sheet) and the Cash Ledger (cash flow statement) instead.