- The second primary financial statement is
the income statement.
That's revenues minus expenses equal net income.
We use the term revenues and expenses all the time,
so let's make sure that we know what these words mean.
In an accounting context,
revenue means the amount
of assets generated in doing business,
and different companies generate assets in different ways.
Walmart, for example, generates assets by putting things
on shelves that you and I buy.
That's how Walmart creates assets.
Microsoft creates assets by creating software and hardware
that you and I then buy,
and we pay Microsoft for those things.
Disney has consumer products.
They have cruises.
They have theme parks.
We pay to use those things or to buy those products,
and that's how Disney generates assets.
Revenue is the amount of assets generated in doing business,
and hopefully,
the assets generated are less than the assets consumed.
Expenses are the amount
of assets consumed in doing business.
For example, Microsoft consumes assets
by paying programmers and by paying for equipment.
Walmart consumes assets by buying the inventory
that they then sell to you and me and by paying rent,
by depreciating buildings, and by paying its employees.
McDonald's consumes resources by buying food,
buying paper, and by renting facilities.
In each case,
the revenues are hopefully more than the expenses
that are consumed.
All of this is put together in the income statement,
a listing of a company's revenues,
less a listing of the company's expenses.
That equals net income.
Now, net income is a very sophisticated economic measure.
It's the net amount of assets generated
by a business through its business operations.
This is the income statement.
Now, let's look at some income statement examples
for companies of which you've heard,
Facebook, Google, Microsoft, and Apple.
All of these companies have income statements
that they have to release to the public on a regular basis.
Now, take a look at these.
First of all, you will see a difference in scale.
Apple is so much larger than Facebook.
In fact, Facebook is the smallest company
on this list in terms of revenues,
yet we talked about Facebook so much.
This illustrates an important point.
The financial statements are only one measure
of a company's performance,
a very important measure,
but only one measure.
So why do we talk about Facebook so often?
Because for Facebook,
its operations now are only a small fraction
of what we think they're going to be in the future.
Facebook is expected to grow substantially in the future,
so we talk a lot about them now.
Now, each of these companies, Facebook, Google,
Microsoft, and Apple, reported a net income
for their most recent fiscal year.
That is, their revenues exceeded their expenses
by quite a large amount.
These four companies are quite successful
at using their assets to generate revenues.
The point with the income statement is this.
A company increases its net assets
through profitable operations.
You can see that each
of these four companies has been very profitable.
As a result, their net assets,
they increase year after year.