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Income Statements

When you are building a financial model, you'll probably start with the income statement.  This isn't really very logical.  if you were analyzing your own life, you'd probably start with your balance sheet. What do I own?  Who do I owe?

But financial modeling is generally done for projecting a business and businesses are all about selling.  Selling is captured on the income statement.

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Here's our first income statement:  


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This is a very basic income statement.  Let's note a couple of things. First, column A has some roman numerals.  I don't generally put these in, but a financial analyst on Wall Street once suggested I do this to show the relationship of the rows on printed copies of the spreadsheet and I think it's a pretty good trick.  So you can see that the Gross Profit line equals the Revenue line minus the Cost of Goods Sold line.  You won't see this very often, but it's a good presentation technique.

What This Model Is

This model works.  In the current month, there are inputs.  Subsequent months are simply equal to the previous month (for example, "=e4").   The COGS line is subtracted from the revenue line to get a Gross Profit figure (also called marginal profit or Net Income). Fixed expenses are then subtracted to get a Net Profit figure.  I even multiplied each month's net profit by 12 to get an annualized net profit figure.

What This Model Isn't

The model above isn't complete.  There is no way to know why revenue is $1,000.  It doesn't show how much lemonade (in cups or liters) was sold.  It doesn't account for input prices.

On the next page, we'll make this income statement more robust.

 
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