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Monday, July 4, 2011

How to take care of some housekeeping details

I want to point out a few things about income statements that accountants
assume everyone knows but, in fact, are not obvious to many people.
(Accountants do this a lot: They assume that the people using financial statements
know a good deal about the customs and conventions of financial
reporting, so they don’t make things as clear as they could.) For an accountant,
the following facts are second-nature:

Minus signs are missing. Expenses are deductions from sales revenue,
but hardly ever do you see minus signs in front of expense amounts to
indicate that they are deductions. Forget about minus signs in income
statements, and in other financial statements as well. Sometimes parentheses
are put around a deduction to signal that it’s a negative number,
but that’s the most you can expect to see.

Your eye is drawn to the bottom line. Putting a double underline under
the final (bottom-line) profit number for emphasis is common practice
but not universal. Instead, net income may be shown in bold type. You
generally don’t see anything as garish as a fat arrow pointing to the
profit number or a big smiley encircling the profit number — but again,
tastes vary.

Profit isn’t usually called profit.The bottom-line
profit is called net income. Businesses use other terms as well, such as
net earnings or just earnings. (Can’t accountants agree on anything?) In
this book, I use the terms net income and profit interchangeably.

You don’t get details about sales revenue. The sales revenue amount in
an income statement is the combined total of all sales during the year;
you can’t tell how many different sales were made, how many different
customers the company sold products to, or how the sales were distributed
over the 12 months of the year. (Public companies are required to
release quarterly income statements during the year, and they include a
special summary of quarter-by-quarter results in their annual financial
reports; private businesses may or may not release quarterly sales
data.) Sales revenue does not include sales and excise taxes that the
business collects from its customers and remits to the government.
Note: In addition to sales revenue from selling products and/or services,
a business may have income from other sources. For instance, a business
may have earnings from investments in marketable securities. In its
income statement, investment income goes on a separate line and is not
commingled with sales revenue.

Gross margin matters. The cost of goods sold expense is the cost of
products sold to customers, the sales revenue of which is reported
on the sales revenue line. The idea is to match up the sales revenue
of goods sold with the cost of goods sold and show the gross margin
(also called gross profit), which is the profit before other expenses are
deducted. The other expenses could in total be more than gross margin,
in which case the business would have a loss for the period.

1 comment:

  1. Accounting is never easy for common people because they don't know which terms to use and how these should be used properly. Some think that terms like profits, sales, and gross - among others - mean the same. Hmm, doing research about accounting will surely be a help, specially for starting businesses. Accounting in business is as important as the product, you know.

    Verna Derosier