2.02 – Taking Care of Housekeeping Details
There are some details about income statements that accountants assume everyone knows, but they might not be so obvious to many people. Let’s clear up some of these common misconceptions.
Minus Signs Are Missing
Expenses are deductions from sales revenue, but you’ll rarely see minus signs in front of expense amounts to indicate they’re deductions. Sometimes parentheses are used to signal a negative number, but that’s about it.
Your Eye Is Drawn to the Bottom Line
It’s common practice to put a double underline under the final profit number for emphasis, though sometimes bold type is used instead. You won’t see anything too flashy like arrows or icons around the profit number.
Profit Isn’t Usually Called Profit
Bottom-line profit is often referred to as net income, net earnings, or just earnings. This course uses net income and profit interchangeably, but formal income statements typically stick to “net income.”
You Don’t Get Details About Sales Revenue
The sales revenue amount is the combined total of all sales during the year. It doesn’t break down the number of sales, the number of customers, or how sales were distributed over the year. Sales revenue is usually reported as a net figure, which includes gross sales minus any deductions for returns, discounts, and allowances.
Investment Income is Separate
In addition to sales revenue, a business might have earnings from investments. This income is listed separately on the income statement and not mixed with sales revenue.
Gross Profit Matters
The cost of goods sold represents the cost of products sold to customers. Gross profit (or gross margin) is the profit before other expenses are deducted. If the total expenses exceed gross profit, the business will have a net loss, usually indicated with parentheses.
Operating Costs Are Lumped Together
Operating costs are often reported under a broad category like selling, general, and administrative expenses. These include a variety of costs such as:
- Personnel compensation, including wages and benefits
- Marketing, advertising, and promotional expenditures
- Insurance premiums
- Rent and property taxes
- Utility costs
- Travel and entertainment expenses
- Telecommunications and Internet charges
- Depreciation of long-term assets
- Professional services like legal and accounting fees
The income statement typically doesn’t provide much detail about these operating expenses. More detailed information might be included in the footnotes of the financial statements, especially for public companies that must disclose more detail in their filings with the SEC
Additional Sections to Enhance Understanding
Importance of Transparency
Transparency in financial reporting is crucial for gaining the trust of investors, creditors, and other stakeholders. Ensure that your income statements and accompanying notes provide a clear and accurate picture of your financial health.
Regular Review and Updates
Regularly reviewing and updating income statements helps in monitoring the financial performance of the business. This practice enables timely identification of issues and implementation of corrective measures.
Customizing for Specific Needs
Tailor the presentation of income statements to meet the specific needs of your business and its stakeholders. Whether you provide more detailed breakdowns or additional context, ensure the information is useful and relevant.
By understanding these key aspects of income statements, you can better interpret the financial performance and health of a business, making informed decisions that drive success.
