What is the purpose of an income statement?

  

A financial team has been properly selected
and charged to proceed with its analysis of EEV’s financial statements.
In the course of its evaluation, it will be assessing the firm’s
operating performance, benchmarking its competitors, and looking at the
industry using financial ratios as its source of measurement.
The income statement measures the firm’s profitability over a period
of time: 1 month, 1 quarter, or 1 year. The statement focuses on the
operations of the firm and explains what was produced and sold. In
essence, it summarizes revenues generated and the results.
Tony understands that managing profitability involves overseeing 3
interrelated factors: volume, cost, and price. He has given you the job
of conducting an in-depth analysis of EEV’s operating performance. You
will analyze the following factors:
Sales volume, cost, and price of each specific productEach product’s contribution to sales in terms of profitThe relationship between sales and supportive employmentTony
has made it clear that he expects you to initiate a constructive
discussion by describing your findings both in narrative form and
through an organized numeric presentation.
Click here to view the EEV income statement, and then complete the following in your paper:
Review the sales volume, cost, and price of each specific product.Review each product’s contribution to sales in terms of profit.Describe the relationship between sales and supportive employment.Provide an Excel spreadsheet that depicts your findings along with your analysis.
Attachments:
excel.xls

Introduction:
When analyzing a company’s financial statements, a comprehensive understanding is necessary to ensure the assessment is productive. Recently, a financial team has been selected to examine EEV’s financial statements. The team will evaluate the company’s operations in comparison to competitors and the industry by utilizing financial ratios for measurement. One of the essential components that the team will focus on is EEV’s income statement. The income statement assesses the firm’s profitability over a specific period and summarizes the generated revenues and outcomes. The evaluation of the income statement is useful in managing profitability through overseeing volume, cost, and price.

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Description:
As part of the analysis, the financial team will assess EEV’s operating performance, specifically the sales volume, cost, and price of each product. Additionally, the team will evaluate each product’s contribution to sales in terms of profit and examine the relationship between sales and supportive employment. Tony, managing EEV’s profitability, expects the team to present their findings in a constructive discussion using narrative form and an organized numeric presentation. In conclusion, this paper will review EEV’s financial statement by analyzing the sales volume, cost, price of each product, and revealing their relationship with supporting employment. Furthermore, we will provide an Excel spreadsheet depicting the findings alongside an analysis.

Objectives:
1. To analyze the operating performance of EEV using financial ratios.
2. To assess the profitability of the firm and its competitors through benchmarking.
3. To evaluate the sales volume, cost, and price of each specific product.
4. To determine each product’s contribution to sales in terms of profit.
5. To describe the relationship between sales and supportive employment.
6. To provide an organized numeric presentation of the findings using an Excel spreadsheet.

Learning Outcomes:
By the end of this analysis, the financial team should be able to:
1. Identify key financial ratios used to assess a firm’s operating performance.
2. Explain the importance of benchmarking in evaluating a firm’s profitability.
3. Analyze the sales volume, cost, and price of each specific product to determine its profitability.
4. Calculate each product’s contribution to sales in terms of profit.
5. Understand the relationship between sales and supportive employment.
6. Present findings in an organized and coherent manner using an Excel spreadsheet.

Solution 1:

Based on the data provided in the income statement, it is evident that EEV is struggling with profitability, with a net loss of $12,000. In order to improve this, the financial team can suggest the following solutions:

1. Reduce the cost of production: By analyzing the cost of each product, the team can identify areas in which costs can be reduced without compromising the quality of the product. This will increase the profit margin for each product and overall profitability for the company.
2. Increase the sales volume for products with the highest contribution to sales in terms of profit: By focusing on products that bring in the highest profits, the company can increase the sales volume for these products. This can be achieved through targeted marketing campaigns and promotions.

Solution 2:

In order to conduct an in-depth analysis of EEV’s operating performance, the financial team should focus on the following areas:

1. Sales volume, cost, and price of each specific product: By reviewing the sales data for each product, the team can identify which products are performing well and which are not. By analyzing the cost and pricing data for each product, the team can identify areas in which costs can be reduced and pricing can be adjusted to improve profitability.
2. Each product’s contribution to sales in terms of profit: By identifying the products with the highest contribution to sales in terms of profit, the team can suggest strategies to increase the sales volume for these products.
3. The relationship between sales and supportive employment: By analyzing the relationship between sales and supportive employment, the team can identify areas in which staffing levels can be adjusted to improve profitability.

An Excel spreadsheet can be created to depict these findings, with charts and graphs illustrating trends and patterns in the data. Through a combination of narrative and numeric presentation, the financial team can initiate a constructive discussion with Tony about how to improve EEV’s profitability.

Suggested Resources/Books:
1. Financial Statement Analysis: A Practitioner’s Guide by Martin S. Fridson and Fernando Alvarez
2. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet by Axel Tracy
3. Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions (The Economist) by Michael Rist

Similar Asked Questions:
1. What is the significance of financial ratios in analyzing a company’s performance?
2. How do operating performance evaluations help benchmark a company against its competitors?
3. Can financial ratios give a complete picture of a company’s financial health?
4. What are the limitations of the income statement in evaluating a company’s profitability?
5. How does cost-volume-profit analysis inform a company’s pricing strategy?

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