2. Example of revenue, income, gross profit, profit, net income, and gain

Let us take a look at an example of a multiple-step income statement with cross-references to the terms we have discussed. Note that in the income statement that we refer to income is a secondary type of revenue.

Company ABC Income Statement For the Year Ended December 31, 20X1
Sales Revenue	$  1,000,000	This line is sales revenue (or just revenue).
Cost of Goods Sold	600,000
Gross Profit	400,000	This line is gross profit (difference between revenue and cost of goods sold).
Operating Expenses:
Selling Expenses	160,000
Administrative Expenses	140,000
Income from Operations	100,000
Interest Income	20,000	This is an example of income.
Rental Income	7,000	This is another example of income.
Gain on Sale of Fixed Assets	3,000	This is an example of gain.
Income before Income Tax	130,000
Income Tax	50,700
Net Income	79,300	This is net income (profit, “bottom line”).

9. Stockholders' Equity

1. Read the article and discuss

1) What Is a Corporation?

Most of the world's largest companies do business as corporations. Companies such as Wal-Mart, Exxon Mobil, General Motors, Ford Motor, and General Electric—each with sales in excess of $100 billion annually—are corporations. As opposed to a sole proprietorship or a partnership, a corporation is a business that is recognized by law as a separate legal entity with its own powers, responsibilities, and liabilities. Before the owners/managers of a business choose to incorporate their business (become corporations), however, they should examine the advantages and disadvantages of doing so.

Advantages

A corporation has several advantages over the sole proprietorship and the partnership form of business. The four major advantages are: (1) limited liability, (2) ease in transferring ownership, (3) continuity, and (4) ease in raising money.

1. Limited liability for the owners. Generally, the owners of a corporation can lose no more than the amount they have invested in that corporation. On the other hand, with a sole proprietorship or partnership, an owner could lose not only her or his investment, but could also lose other personal assets as well. In other words, the corporate form of business "shields" the owners from most creditors. This occurs because corporations are considered to be legal entities, separate and distinct from their owners. (Due to their legal entity status, a corporation can sue others, can be sued, and must pay income taxes on its taxable income.)

2. Ease in which owners can sell their ownership interest. If the stock is publicly traded, investors can sell their ownership interest in a corporation in a matter of minutes simply by giving instructions to their stockbroker. If the stock is not publicly traded, the stock certificate can be transferred to another owner by signing a transfer statement.

3. Continuity. When a stockholder sells shares of stock, the transaction is between the seller and the buyer of the stock. Unless the corporation is the buyer or the seller, the corporation is not involved in the transaction. This means that even if a corporation's stock is the most actively traded stock of the day, the corporation itself will not skip a beat in its day-to-day operations. When notified by a stockbroker of a transfer between stockholders, the corporation merely changes in its records the name of the owner of the shares.

4. Ease in raising money. Because of limited liability and the ease of buying/selling shares, it is easy to understand why investors are more attracted to investing in corporations rather than in sole proprietorships or partnerships. This investor attraction allows corporations to raise the capital needed to manage and expand their operations.

Disadvantages

Some view the legal complexity of starting and running a corporation to be a disadvantage. To incorporate, an application must be filed with and approved by one of the fifty states, and once approved, the corporation must comply with that state's regulations. In contrast, a sole proprietorship can be started in minutes, sometimes with nothing more than a tax identification number from the state. Many of the legal requirements imposed on a corporation do not apply to sole proprietorships.

Another disadvantage associated with corporations is the possibility of "double taxation" on the dividends it pays. Some argue that a regular corporation's net income is first taxed on the corporation's income tax return. Then, if the corporation distributes some of the net income to the stockholders as a dividend, the dividend will be taxed again on the stockholders' personal income tax returns. (To gain more insight into this and to minimize or to avoid this potential problem, you should discuss various forms of business structures with tax and legal professionals.)

Governance

The owners of corporations are referred to as stockholders or shareholders, because they hold the shares of stock, which serve as the evidence of their ownership. (The term stockholders and shareholders are used interchangeably. However, we will use the term stockholders.)

Because it would be impossible for 30,000 stockholders to sit around a boardroom table and give meaningful input to the direction of their company, the stockholders elect a board of directors as their representatives in the corporation's affairs. The board of directors formulates the corporation's policies and appoints officers of the corporation to carry out those policies. The board of directors also declares the amount and timing of dividend distribution, if any, to the stockholders.

The officers of a corporation are appointed by the corporation's board of directors to carry out (or execute) the policies established by the board of directors. The officers include the president, chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO), vice presidents, treasurer, secretary, and controller.