Income Statement

Below, we show how the Income Statement is constructed:

Details & Assumptions

The Income Statement involves making several pricing and cost assumptions, based on our current knowledge of the business:

Revenue

• ABC Company, Inc. prices Cloud at $16.00 and Time at $36.00 per software license.
• The company sold 1.5 million copies of Cloud and 3 million copies of Time in 20X0. That was the first year ABC Company generated any revenue.
• Each software application requires the payment of a $5.00 renewal fee every year. ABC Company renews approximately 25% of the licenses it sold in the prior year; this renewal fee acts as a source of recurring revenue.
• Renewals happen for only one additional year and that the recurring revenue stream is based on the prior year’s new licenses. ABC Company does not incur any additional costs for renewals.
• 20X1, there is 5% growth in units sold (both Cloud and Time units)
• 20X2-20X6, there is 5% annual growth in units sold (both Cloud and Time units)

Cost of Goods Sold

• Packaging costs = $1.50 per unit
• Royalties to technology patent owners = $3.00 per unit
• Marketing expense = $3.00 per unit
• Fulfillment expense = $4.00 per unit
• Fees to smartphone companies = 15% of sale price (does not include renewal fees)
• ABC Company incurs a 15% bad debt allowance on total revenues (we consider this as part of cost of sales, wherein ABC Company is unable to collect from customers’ credit card companies)

General & Administrative Expenses

• Rent of development property and warehouse facilities = $350,000 annually
• License fee to telecom internet providers = $1.5 million annually
• Salaries and benefits = $1.75 million annually
• Sales commissions = 5% of all sales including renewals
• Offices and other administrative costs = $750,000 annually
• CEO salary and bonus = $1.25 million annually + 3% of all sales including renewals

Taxes

• Federal tax rate = 35% and state tax rate = 5% on EBT (totalling 40%)

Depreciation

• This is from the Fixed Asset Schedule created earlier (ABC - Fixed Assets)

Interest Expenses

• This is from the Debt Schedule created earlier (ABC - Debt Schedule)

Finance Fees

• These are from deferring finance fees of 1% associated with the initial Debt raising (ABC - Transaction Details)