Expenses are important to the income statement. These include interest expenses, depreciation of fixed assets, and costs of goods sold. Knowing how to calculate expenses can help you make your income statement more accurate.
Working capital per dollar of sales
Using the working capital per dollar of sales formula can help a business calculate the average expenses on an income statement. However, not all businesses have the same amount of working capital. For example, a furniture manufacturer sells finished products and collects payment in cash. But a retailer may generate 70% of its revenue in November and December and need to cover its expenses all year long.
The working capital per dollar of sales calculation is important to business owners because it helps them determine how much money they have available to cover operational expenses. A high number indicates that the business isn’t using its available cash effectively. And because cash is scarce, it’s important for businesses to use financial resources wisely.
The working capital per dollar of sales formula works by subtracting current liabilities from current assets. Current assets include accounts receivable, inventory, and cash. Current liabilities include bills due within 12 months.
Cost of goods sold
During an accounting period, you can measure the amount of money your business is making by tracking cost of goods sold (COGS). If you are unsure of the costs associated with your product, this is a great way to find out. Using COGS, you can see areas to raise prices, decrease costs, …How to Calculate Expenses on Income Statement Read More