Reference no: EM131961382

Income Statement Discussion:

Referencing this week's readings and lecture, address the following:

• What are the two causes of an increasing or decreasing sales number?
• Discuss all the reasons that might explain an increase or decrease in gross profit.

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version].

• Chapter 3: The Income Statement

Article

Ford Motor Company. (2014). Ford Motor Company 2012 annual report.

Recommended Resources

Articles

Harper, D. (n.d.). Financial statements: Cash flow

Harper, D. (n.d). Financial statements: Earnings.

Loth, R. (2011, October). Understanding the income statement

• Respond to at least two of your classmates' posts.

Edwards:

Sales numbers may decrease for a company if their supplier gives them volume discounts. Organizations present big merchants a reduced rate if they purchase a large quantity of their products. An establishment can "offer its widgets at $50 each if fewer than 1,000 units are ordered. However, it may cut the price to $45 when 1,001 to 5,000 units are ordered and further reduce the price to $40 for orders over 5,000 units" (Epstein, 2014, p. 3.2). This can allow a company to sell a new product for a lesser price that what their competitors are selling it for, allowing them to increase their sales.

One factor that makes sales number decrease is when a customer returns a product after they have purchased. A lot of stores will give you 30 days to return clothing for a full refund if it does not look worn and if the customer has a receipt. Walmart has a customer service line that is mainly used for returns where customers are allowed to return products from the electronics, furniture, accessories and the bedding department. Operating cost and employee salaries can cause a company to spend more money and they compensate that lost money by increasing their prices which could lead to decreased sales.

Gross profit is how much a company has left over after spending funds that were used to manufacture, purchase and sell goods. When a supplier stops giving volume discounts, companies have to purchase them at regular price which can decrease gross profit. It can also be decreased when product prices are too low. Gross profit can be increased when companies do more with less, which means they reduce the number of employees and still get the same amount of work done. Gross profits also increase when products or services are in demand like seasonal items are during Christmas, Easter, or valentine's day.

References

Epstein, L. (2014). Financial decision making: An introduction to financial reports.

Quentin Reply:

The two causes of an increasing or decreasing sales number is known as revenues and expenses. Epstein defined revenue as "how much revenue the company brought in by selling its products or services" and defined expenses as "how much the company spent to keep the doors of the business open" (Epstein, 2014, p. 3.1). This work almost like a checks and balances system. In order for the company to continue making the good and providing the services, there are operating costs to ensure that manufacturing continues.

Ways to increase the gross profit are increasing the sale prices, sales volume, by applying a reduction in the cost of goods sold. This will boost profit but there would be no counteraction due to the cost of goods being lowered. Reasons as to what may explain a decrease in gross profit, include those operating expenses such as "selling, general, and administrative expenses, research and development, depreciation and amortization" (Cain, 2018, Week 3 Lecture). These are expenses that are necessary for the operation of business, however, financial managers have to examine the frequency of such and the price tag associated with it. Lower selling prices, lower sales volume and an increased cost of goods sold directly influences the gross profit as well, negatively.

Cain, M. (2018). Week 3 Lecture.

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version].