Introduction to Income Statements, Part 2

 

In fact, profit and cost of goods sold are the two most crucial aspects of an income statement, or at least people will look at them first. But an income statement is really a sum of its parts, all of which must be carefully, consistently and correctly considered.

When it comes to reporting depreciation expense, a business can use a shorter life span, spend more in the first few years or have a longer life span, and spread the cost evenly over the years. Depreciation can be a huge expense for some businesses and the reporting system is especially important for them.

One of the most complex aspects of an income statement is the reporting of employee pensions and retirement benefits. The GAAP rule on these expenditures is complex, and the business must make some key estimates, such as the expected return on the fund portfolio allocated to these future obligations. This and other estimates affect the reported expenses.

Most products are sold with either express or implied warranties and guarantees. The business must estimate the cost of these future liabilities and record this amount as an expense, along with the cost of goods, during the period of sale. Customers cannot wait for the product to be repaired or replaced, it must be predicted as a percentage of the total number of products sold.

Other operating expenses reported on an income statement may include time or valuation considerations. Some expenses are discretionary, which means that how much money you spend during the year depends on the discretion of the management.

Earnings before interest and taxes (EBIT) sales reduce all expenses above this line. It depends on all the decisions taken to record sales revenue and expenses and how accounting systems are implemented.