fixed income

Examples of fixed income in the following topics:

• Leverage Models

  • Operating leverage models include ratios, such as fixed costs to variable costs/total costs, fixed costs to income, and the DOL.
  • The total fixed costs are $1,000.
  • Another common way of defining operating leverage is by dividing total fixed costs by operating income, or EBIT (earnings before interest and taxes).
  • For a given level of sales and profit, a company with higher fixed costs has a higher contribution margin, and hence its operating income increases more rapidly with sales than a company with lower fixed costs (and correspondingly lower contribution margin).
  • Operating leverage is equal to total fixed costs divided by operating income.

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • $Return\quad on\quad Total\quad Fixed\quad Assets\quad =\quad \frac { Net\quad Income }{ Average\quad of\quad Fixed\quad Assets }$
  • Return on Total Fixed Assets equals the business's net income divided by the average value of the business's total fixed assets for the accounting period.
  • You calculate the average value of the business's fixed assets by adding the value of the business's total fixed assets at the beginning of the accounting period to the value of the total fixed assets at the end of the period.

• Defining Operating Leverage

  • Operating leverage is a measure of how revenue growth translates into growth in operating income.
  • Operating leverage is also a measure of how revenue growth translates into growth in operating income.
  • Manufacturing companies tend to invest heavily in fixed assets.
  • These include the ratio of fixed costs to total costs, the ratio of fixed costs to variable costs, and the Degree of Operating Leverage (DOL).
  • Therefore, its operating income increases more rapidly with sales than a company with lower fixed costs (and correspondingly lower contribution margin).

• Other Comprehensive Income

  • Most changes to equity, such as revenues and expenses, appear in the income statement.
  • Changes in the revaluation surplus account (this account records changes between the market and book value of fixed assets on the balance sheet)
  • The individual components of the balance can be presented in a separate statement of comprehensive income or a separate section for comprehensive income within the income statement.
  • Some IFRSs (international financial reporting standards) require or permit that some components be excluded from the income statement and instead be included in other comprehensive income.
  • Other comprehensive income can be reported in its own statement of comprehensive income or in a separate section within the income statement.

• Defining Financial Leverage

  • Financial leverage, in a corporate finance sense, exists when a company finances assets and internal operations through fixed obligations.
  • Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.
  • Financial leverage is the financing of assets and internal operations with fixed obligations.
  • DFL is the percentage a company's earnings change as a result of a particular change that a company makes in its operating income.
  • As a company uses more financial leverage, higher levels of operating income are needed to cover the additional fixed obligations (interest on debt and fixed dividends on preferred stock).

• Uses of the Income Statement

  • The purpose of the income statement is to show managers and investors whether the company was profitable during the period being reported.
  • The income statement, sometimes referred to as a profit & loss statement, reflects the revenues and expenses for a specific period of time.
  • Revenues minus expenses equals the net income or (loss) for that particular period.
  • The income statement also reflects the periodic decline in the value of fixed and intangible assets when depreciation and amortization expenses are reported.
  • Explain how interested parties use the income statement to assess a company's profitability

• Tax Rate

  • An income tax could have multiple statutory rates for different income levels, whereas a sales tax may have a flat statutory rate.
  • To calculate the average tax rate on an income tax, divide the total tax liability by the taxable income.
  • Some proponents of this system propose to exempt a fixed amount of earnings (such as the first $10,000) from the flat tax.
  • It may be calculated by noting how tax changes with changes in pre-tax income, rather than with taxable income.
  • In U.S. income tax law, the term is used in relation to determining whether a foreign income tax on specific types of income exceeds a certain percentage of U.S. tax that might apply on such income.

• Fixed Assets Turnover Ratio

  • Fixed-asset turnover is the ratio of sales to value of fixed assets, indicating how well the business uses fixed assets to generate sales.
  • It is, therefore, obligatory that in order to accurately determine the net income or profit for a period depreciation, it is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period.
  • Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet).
  • Fixed asset turnover = Net sales / Average net fixed assets
  • Fixed-asset turnover indicates how well the business is using its fixed assets to generate sales.

• Noncash Items

  • Noncash items that are reported on an income statement will cause differences between the income statement and cash flow statement.
  • Fixed assets, also known as a non-current asset or as property, plant, and equipment (PP&E), is an accounting term for assets and property.
  • PP&E are often considered fixed assets: they are expected to have relatively long life, and are not easily changed into another asset .
  • The latter affects net income.
  • In each period, long-term noncash assets accrue a depreciation expense that appears on the income statement.

• The Circular Flow Model

  • The basic circular flow model consists of two sectors that determine income, expenditure, and output.
  • This equation means that the expenditure of buyers (households) becomes income for sellers (firms).
  • The firms spend the income on factors of production, which "transfers" the income to the factor owners.
  • The factor owners spend the income on goods which leads to the circular flow of payments .
  • The PPF is a graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production.