Question

How does a company know if it is profitable?

After reviewing different costing methods, I see how it is possible for net income to yield varying profit (loss) outputs depending on the costing method used to make this analysis. If net income is inconsistent between costing methods, how does a company know if they are profitable or if a loss has been incurred?

Answer 1

To determine if the company is profitable, financial statement readers should focus on sales revenue, merchandise expense, net income and operating expenses.

• Sales revenue takes the company's profitability to commercial success.
• A low cost of goods sold shows investor that company manages gross profit and it results in increasing profitability.
• The higher the operating charges the lower the net profit of the company.
• Net income is a key factor to determine if the company is profitable.

If net income is inconsistent between costing methods, company would know if they are profitable or if a loss has been incurred with the indicator sales revenue.