Introduction to Income Statements, Part 1

 

The first and most important part of an income statement is the line that reports sales revenue. Businesses should be consistent year after year when reporting sales. For some businesses, timing of sales revenue is a major issue, especially when the final acceptance by the customer depends on performance testing or other conditions that must be satisfied. For example, when does an advertising agency record sales revenue for a business that it has prepared for its client? When the work is completed and sent to the client for approval? When the client approves it? When ads appear in the media? Or when the billing is over? These are the factors that a company needs to determine in order to report sales revenue, which must be consistent every year and the reporting time of the financial statement.

The next line of an income statement is the cost of goods sold. There are three ways to report cost of goods sold. One is called “First Time” (FIFO); Another is the “last resort” (LIFO) method and the final method is the average cost method. The cost of goods sold is a big item in an income statement and the way it is reported can have a significant impact on reported lows.

Other items in an income statement include inventory write-ups. A business should constantly check its inventory to determine the costs of theft, damage and deterioration, and to implement the LCM or LCM method. Bad credit is also an important part of the income statement. Bad credit is the debts owed by customers who have purchased (accounts receivable) as a loan to a business but have not paid. Again, the timing of bad credit is very important. Do you report it before or after the collection efforts end?