The income statement examines the overall profitability of a firm over a particular period of
time. As such, it is also known as a profit-and-loss statement. It identifies all sources of revenues
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generated and expenses incurred by the business. For the business plan, one should generate
annual plans for the first three to five years. Some suggest that the planner develop more
“granulated” income statements for the first two years. By granulated, we mean that the first
year income statement should be broken down on a monthly basis, while the second year should
be broken down on a quarterly basis.
Some of the key terms found in the income statement are as follows:
• Income. All revenues and additional incomes produced by the business during the designated period.
• Cost of goods sold. Costs associated with producing products, such as raw materials and costs
associated directly with production.
• Gross profit margin. Income minus the cost of goods sold.
• Operating expenses. Costs in doing business, such as expenses associated with selling the product or
the service, plus general administration expenses.