Impacts to the Profit and Loss Statement
Impacts to the Profit and Loss Statement
An income statement is an important financial statement, which is used to provide information about an organization’s performance for a specific accounting period (Griffin ; BarCharts, 2014). The income statement is also referred to as the profit and loss statement and its purpose is to analyses an organization’s revenues and expenses during a specific period. The four pats of an income statement are revenues, expenses, profits, and losses (Griffin & BarCharts, 2014). This statement provides information on how the revenues were transformed into the current net earnings, which could be either profits or losses. This paper will discuss the different areas of the pro forma income statement of Tim’s Coffee Shoppe, which may be impacted by large businesses moving into the neighboring buildings in this area. This is expected to increase the volume sales, which will result in a growth of the coffee business (Griffin ; BarCharts, 2014).
Discussion on the Different Areas of the Pro Forma Income Statement
Due to the projected increase in sales, which will be influenced by the large businesses, which are moving in around his coffee shop, the business will increase which will also lead to increased income earned (Peterson ; Fabozzi, 2012). The revenues collected through business operations, which in this case includes all revenues collected from the sale of coffee contributes to the income earned. Income is majorly impacted by the volume of sales where a decrease in sales will lead to a decrease in income where else an increase in volume sales is also likely to result in an increase in income for an organization (Peterson ; Fabozzi, 2012).
Expenses include the cost incurred in ensuring that customers are able to access a good or service from an organization. In this case, expenses are costs incurred in providing coffee to customers. This may include the products used in making the coffee as well as the workforce required to make the coffee and serve different customers (Peterson ; Fabozzi, 2012). Increased volume sales means that more products will be required to produce more coffee, which may also lead to an increase in workers to operate and serve customers in Tim’s Coffee Shoppe. Expenses are divided into different components with each component being impacted differently (Peterson & Fabozzi, 2012).
The salaries may increase due to the increase in workload, which may result in most of the employees working for extra shifts to address the rising demand for coffee. This can also be substituted by hiring new employees to help the current employees in addressing the expected increase in demand for coffee products (Griffin & BarCharts, 2014). This will mean that more salaries are paid to the new employees, which will increase the salary. This is necessary since the current employees may be unable to address the rising demand adequately (Griffin & BarCharts, 2014).
Rent is the cost incurred by an organization in paying for temporary use of property to run their operations, which may include coffee production and serving customers in their premises (Petrova, 2016). An increase in the number of customers will mean that the premises be increased to serve the increased demand. More customers in a coffee shop will mean that the coffee shop increases the number of chairs and tables to accommodate the rising number of customers (Petrova, 2016). This will mean that Tim’s Coffee Shoppe will have to increase its space, which will lead to increased costs related to rent payments. This is also important and cannot be ignored as inadequate space may discourage the new customers who may opt to go to other coffee shops (Petrova, 2016).
Depreciation involves a decrease in value of an organization’s assets during a specific period where the assets are used. This expense is meant to imply a used portion of a fixed asset in a given period (Petrova, 2016). This expense is continuously charged over time until the asset is ultimately consumed which may lead to the recovery of a resale value or a replacement of the asset (Petrova, 2016). A coffee shop has different assets, which may include equipment in the coffee shop, furniture, and other machines, which are used in the daily operations of the coffee shop (Petrova, 2016). An increase in demand will impact the usage of these equipment and machines in various forms which will reduce the value of the asset in its remaining life. This will increase the depreciation expense of the different assets (Petrova, 2016).
Supplies are materials and products supplied to an organization to enable the organization to effectively operating to achieve the desired goals. In a coffee Shop, supplies may include coffee, water, sugar, and furniture which are required to ensure that the organization is able to produce and serve its customers with quality coffee products (Trpeska, Atanasovski, & Lazarevska, 2017). This will be reported on the income statement to indicate the cost of supplies used in a certain period. Based on a projected increase in production to serve the rising demand, more supplies will be required to ensure that all customers are adequately served. This will lead to increased supplies expenses which will impact the income earned for the specific period (Trpeska, Atanasovski, & Lazarevska, 2017).
Lease (on the refrigerator)
The lease on the refrigerator will likely remain the same, as this is not affected by an increase in demand unless the organization opts to lease more machines (Trpeska, Atanasovski, & Lazarevska, 2017). Lease is the amount required to pay for a machine or equipment, which is done under specified period. This amount is usually a fixed amount, which is not affected by an increase in demand or any other factors, which may impact an organization (Trpeska, Atanasovski, & Lazarevska, 2017).
Tax expense involves the cost of adhering to tax laws and policies, which require organizations to pay a certain amount of money to the government, which is determined after a calculation of its profits (Ong, 2018). Due to the increased demand for Tim’s coffee products, the profits are likely to increase which will lead to an increased tax expense. This is done after a specific tax period, which is calculated through a certain tax percentage, which has been determined by the government to all business income (Ong, 2018).
Interest (on loans currently held)
An analysis on the income statement of Tim’s Coffee Shoppe indicates an interest expense of 72,500 which is the cost incurred by this organization for borrowed funds (Ong, 2018). This expense is not likely to change, as this has already been determined at the start of the borrowing to the end of the payment period. Unless the organization gets more funds to help in addressing the increasing demand, the interest expense is likely to remain the same and would not be affected by an increase in sales (Ong, 2018).
Insurance expense involves the cost incurred in paying for insurance premiums on different assets of an organization. This expense is paid in advance, which is not likely to be impacted unless the organization gets more machines and equipment, which will increase the amount of the insurance expense (Peterson & Fabozzi, 2012). Other insurance expenses may be due to medical insurance cover, which covers the employees of the organization. This will also not change unless the organization increases the number of employees to address the projected increase in demand for the organization’s products (Peterson ; Fabozzi, 2012).
Given What You Have Assumed and Projected, Will the Total Expenses Increase or Decrease? Why?
Given the projected sales increase, the expenses will increase as most of the line items on the expense category have increased which will also impact the total expenses similarly (Griffin ; BarCharts, 2014). To address the projected increase in demand, some of the expenses will increase to ensure that the organization is adequately prepared to serve the new customers adequately (Griffin ; BarCharts, 2014). Some of these expenses are unavoidable which makes it necessary for the organization to take the risk and incur these costs, which may be covered by the increase in revenue, which is attributed to the increased sales (Griffin ; BarCharts, 2014).
Given What You Have Assumed and Projected, Will the Net Profit Increase or Decrease? Why?
Based on the projected increase in sales, the net profit will increase due to more sales, which will increase revenue collection. Increased revenues are able to cover the increased expenses, which will increase the net profits of the organization (Petrova, 2016). The revenues as well as the expenses in an income statement impact the net profits. Based on the collected information, the revenues will increase income earned, which will also lead to an increase in the profits (Petrova, 2016). However, if the expenses increase more than the desired level, this may negatively impact the profits which may decrease. This requires a careful consideration and analysis of the expected sales volume increase in order to effectively manage the expenses to prevent any losses, which may be attributed to increased expenses (Petrova, 2016).
Griffin, M. P., ; BarCharts, I. (2014). Financial Statements. Boca Raton, FL: QuickStudy Reference Guides.
Ong, A. (2018). Financial Reporting and Corporate Governance: Bridging the Divide. Journal of Management Research (09725814), 18(1), 37–43.
Peterson, D. P., ; Fabozzi, F. J. (2012). Analysis of Financial Statements (Vol. 3rd ed). Hoboken, N.J.: Wiley.
Petrova, R. (2016). Financial Statements Reporting as a Tool for Manipulating the Perception of Accounting Information. Business Management / Biznes Upravlenie, (1), 15–34.
Trpeska, M., Atanasovski, A., ; Lazarevska, Z. B. (2017). The relevance of financial information and contents of the new audit report for lending decisions of commercial banks. Accounting ; Management Information Systems / Contabilitate Si Informatica de Gestiune, 16(4), 455–471