FACTORS AFFECTING A COMPANY’S INCOME STATEMENT

Copyright © Texas Education Agency, 2011. All rights reserved.

2 “Copyright and Terms of Service

Copyright © Texas Education Agency. The materials found on this website are copyrighted © and trademarked ™ as the property of the Texas Education Agency and may not be reproduced without the express written permission of the Texas Education Agency, except under the following conditions: 1) Texas public school districts, charter schools, and Education Service Centers may reproduce and use copies of

the Materials and Related Materials for the districts’ and schools’ educational use without obtaining permission from the Texas Education Agency;

2) Residents of the state of Texas may reproduce and use copies of the Materials and Related Materials for individual personal use only without obtaining written permission of the Texas Education Agency;

3) Any portion reproduced must be reproduced in its entirety and remain unedited, unaltered and unchanged in any way;

4) No monetary charge can be made for the reproduced materials or any document containing them; however, a reasonable charge to cover only the cost of reproduction and distribution may be charged.Private entities or persons located in Texas that are not Texas public school districts or Texas charter schools or any entity, whether public or private, educational or non-educational, located outside the state of Texas MUST obtain written approval from the Texas Education Agency and will be required to enter into a license agreement that may involve the payment of a licensing fee or a royalty fee.

Copyright © Texas Education Agency, 2011. All rights reserved.

3

Getting Started

Let’s understand factors of production through an engaging activity. Go to The four factors of production.

Copyright © Texas Education Agency, 2011. All rights reserved.

4

Name those FACTORS!

Natural Resources Human Resources

Capital ResourcesEntrepreneurial

Resources

Factors of Production

Copyright © Texas Education Agency, 2011. All rights reserved.

5

Natural Resources

• Trees• Animals

•Water• Plants• Minerals

• Light• Wind

Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of Productio

n

Raw materials found in nature:

Copyright © Texas Education Agency, 2011. All rights reserved.

6

Human ResourcesNatural

ResourcesHuman

Resources

Capital Resources

Human Resources

Factors of Productio

n

Knowledge, efforts, and skills of peopleworking in various roles: CashierDoctorChefBankerEngineerManager

TeacherResearcherParamedicWelderGovernorMaid

CustodianAccountantPoliceArchitectWriterPainter

Copyright © Texas Education Agency, 2011. All rights reserved.

7

Capital ResourcesNatural

ResourcesHuman

Resources

Capital Resources

Human Resources

Factors of Productio

n

Things used to produce goods and services: BuildingFactory Warehouse

Materials

FabricLumber

EquipmentSewing

Machine Delivery Truck

Copyright © Texas Education Agency, 2011. All rights reserved.

8

Entrepreneurial ResourcesNatural

ResourcesHuman

Resources

Capital Resources

Human Resources

Factors of Productio

n

Required to meet the changing wants and needs of people. Entrepreneurial resources identify new processes, develop new resources, and create new technologies.

Copyright © Texas Education Agency, 2011. All rights reserved.

9

Organize Your ThoughtsN

ATU

RA

L • List Natural Resources H

UM

AN • List

Labor Forces

CA

PIT

AL • List

Buildings,

• Materials, and Equipment

EN

TR

EPR

EN

ER

IAL • List

Creative Resources

Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of Productio

n

Copyright © Texas Education Agency, 2011. All rights reserved.

10

What’s in an Income Statement?

•Revenue•Less: Cost of SalesGross

Profit

•Less: Expenses

Net Income

Learn about the income statement through visiting the U. S. Securities and Exchange Commission.

Copyright © Texas Education Agency, 2011. All rights reserved.

11

Income Statement Format (Sample)

RevenueCost of Sales Gross Profit (Revenue less Cost of Sales)Operating Expenses (i.e., Salaries, Rent, Depreciation)Income From Operations (Gross Profit less Expenses)Less: Interest Expense (or Add Interest Income)Net Income Before Tax Income TaxNet Income After Tax

•Revenue•Less: Cost of SalesGross

Profit

•Less: Expenses

Net Income

Copyright © Texas Education Agency, 2011. All rights reserved.

12

Calculating Net Income and Net Loss

REVENUE less EXPENSES equals…

If REVENUE > EXPENSES, then NET INCOME

If REVENUE < EXPENSES, then NET LOSS

•Revenue•Less: Cost of SalesGross

Profit

•Less: Expenses

Net Income

Copyright © Texas Education Agency, 2011. All rights reserved.

13

Tying it all together Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of

Production

• Revenue• Less:

Cost of SalesGross

Profit

• Less: Expenses

Net Income

How do you utilize the factors of production to improve a business’ profits, revenues, and expenses?

Copyright © Texas Education Agency, 2011. All rights reserved.

14

Increasing Revenue Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of

Production

• Revenue• Less:

Cost of SalesGross

Profit

• Less: Expenses

Net Income

Increase price

Increase producti

vity

Increase promotio

n

Copyright © Texas Education Agency, 2011. All rights reserved.

15

Decreasing Cost of Sales Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of

Production

• Revenue• Less:

Cost of SalesGross

Profit

• Less: Expenses

Net Income

Decrease cost inputs

Increase productiv

ity of direct labor

Decrease waste

Copyright © Texas Education Agency, 2011. All rights reserved.

16

Decreasing Expenses Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of

Production

• Revenue• Less:

Cost of SalesGross

Profit

• Less: Expenses

Net Income

Reduce variable

costs

Evaluate

fixed costs

Eliminate

wasteful

spending

Copyright © Texas Education Agency, 2011. All rights reserved.

17

Independent Activity

REVENUE COST OF SALES EXPENSES

Copyright © Texas Education Agency, 2011. All rights reserved.

18

Evaluation

2009 2008

Revenue 200,000 250,000

Cost of Goods Sold 75,000 85,000

Gross Profit 125,000 165,000 Gross Profit % 63% 66%

Units Sold 80,000 100,000

My Potato Chip Corporation

19

Evaluation

Copyright © Texas Education Agency, 2011. All rights reserved.

Copyright © Texas Education Agency, 2011. All rights reserved.

20

Resources Natural Resources

Human Resources

Capital Resources

Human Resources

Factors of

Production

• Revenue• Less:

Cost of SalesGross

Profit

• Less: Expenses

Net Income

Brown, Betty J., Clow, John E., & Brown, Kenneth W. (1995). Introduction to Business. New York: Glencoe/Mac-Graw Hill.

________ (2007). Beginner’s Guide to Financial Statements. Retrieved from U.S. Securities and Exchange Commission Web site:http://www.sec.gov/investor/pubs/begfinstmtguide.htm

Penn, Pace (2010, February 13). The four factors of production. Retrieved from University of North Carolina at Chapel Hill, LEARN NC Web site: http://www.learnnc.org/lp/pages/3760

Rubistar. (2000 – 2008). Retrieved from ALTEC of University of Kansas Web site: http://rubistar.4teachers.org/index.php