Important Parts of an Income Statement, Part 1

An income statement, also known as profit and loss statement or statement of operations, is one of the main financial statements in a business, including the balance sheet, cash flow statement and stockholder’s equity statement. It is a summary of the business’s revenues, expenses, gains, losses, net income as well as other totals for a particular period all these are shown in the statement’s heading. In the case of publicly traded stocks, the earnings per share should be reflected on the face of the income statement.

The sales revenue report is the considered as the most important portion of the income statement. Businesses always have to be consistent in recording their sales year after year. Some businesses have a problem recording the timing of recording their dales revenue. This happens especially when performance tests and other conditions that need to be complied with affect a customer’s final acceptance. For instance, an advertising agency may have a confusing deal a time reporting the sales revenue for a particular campaign that it has prepared for a client. It may either be upon completion of work or when it is sent for the client’s approval. It can also be upon the client’s approval, the advertisement’s appearance in the media, or upon completion of the billing.  These are some considerations that a business must look into and carefully decide on in reporting sales revenue. Reporting should always be consistent and its timing must recognized on the financial statement.

The next important part of the income statement is the cost of goods sold expense. This type of expense is a major item in an income statement and the manner by which it is reported can make a significant impact on the profit and loss statement report. The cost of goods sold in the income statement can be reported in three different ways. These are First In-First Out or FIFO method, the Last In-Last Out or LIFO and the Average Cost method.

Inventory write-downs and bad debts are also important items that are included in the income statement. Bad debts are accounts that customers owe the business as in the form of accounts payable, but are most likely to be unpaid. The timing of reporting bad debts is also one thing that should be taken with serious consideration, whether it should be reported before or after exhausting collection activity. A business should check its inventory regularly and carefully measure any possible losses that may be caused by theft, depreciation or damage. The use of the lower of cost market or LCM method is recommended for such.