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Preparing an Income Statement

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Service Business Income Statement
Preparing an Income Statement

Service Business Income Statement

If you operate an arts and crafts service business, you won't have a cost of goods sold. Why? It's because the true value of what you provide in your business is a thought or idea rather than a tangible product. For example, if I provide just the jewelry designs to a jewelry manufacturer, I operate an arts and crafts service business.

True, I provide the designs to the manufacturing company on a DVD and this is a tangible product - but the manufacturer is not paying for the relatively de minimis cost of the DVD; they are paying for the intellectual product provided on that electronic media.

If you operate a arts and crafts service business look to your Salary Expense to measure whether or not the business is operating effectively and efficiently. In this example, revenue is twice that of salary expense. The relationship between revenue and salaries is pretty standard.

However, this is a relative opinion. In actual practice, you might not be satisfied with one month's Net Income of $3,300. But, how about if you’re the only employee. Would you be happy with take home income (before taxes) of $8,300?

Another income statement application is to use it as the starting point to determine what the effect would be on revenue and net income if you were able to take on more projects by hiring more employees. Keep in mind that’s predicated on the fact that you’ll be able to find the work to keep the additional employees busy and the skill level of new employees would also have a material effect on revenue.

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