Income statements are an important component provided to business leaders and potential investors to clearly illustrate the financial health of an organization. It is important to fully understand the information provided within the income statement to accurately ascertain the information provided. A mistake made in the creation of an income statement can have massive consequences. Business leaders must clearly understand policies regarding revenue and expenses in order to correctly assess the financial stability of an organization using its income statements.
In order to interpret information found on an income statement, one must understand policies regarding revenue and expenses. A complete understanding of revenue recognition, product …show more content…
A simple example of this would be a normal sale at a retail store. As a consumer shops, he or she chooses items to buy. When the consumer arrives at the counter, the cashier scans the items. At this time, an agreement has been made to begin the transfer of assets (money for items). When the consumer actually pays for the items, the action is completed and revenue can be properly recognized. These two steps must occur before revenue can be recognized on an income statement. Revenue recognition prevents an organization from reporting revenue while reporting the inventory sold to gain the revenue. It is also important to account for costs at the proper time as well. Period and product costs are expenses that require proper timing to be properly reported. Product costs are costs associated with the manufacturing of a product. “Since these costs are often treated as inventory and do not appear on a company’s income statement until the final product is sold, you may sometimes see these referred to as “inventoriable costs” (Investopedia, 2014). Product costs consist of materials used …show more content…
Leaders and investors can use them to compare companies to determine which is performing at a higher level. To gain further knowledge about income statements, one merely needs to locate annual reports on an organization’s website. Apple and Samsung are electronics companies that compete with each other on many items. Cell phones, computers, and tablets are examples of items that these companies try to outperform each other to gain a stronger foothold in the market. Apple’s annual reports for 2016, 2015, and 2014 are readily available on its website in the investor information section titled “SEC filings” (insert link). Samsung’s annual reports for 2014 and 2013 are available on its website as well (insert link). One simply needs to search for annual reports, and the location is identified. These two organizations do not use the same reporting principles to create their financial reports. Apple uses generally accepted accounting principles (GAAP) according to its annual report while Samsung uses international financial reporting standards (IFRS). Using information provided in the respective income statements a quick comparison of annual income can be made. The following table provides a comparison of some of the items found on the income
In order to interpret information found on an income statement, one must understand policies regarding revenue and expenses. A complete understanding of revenue recognition, product …show more content…
A simple example of this would be a normal sale at a retail store. As a consumer shops, he or she chooses items to buy. When the consumer arrives at the counter, the cashier scans the items. At this time, an agreement has been made to begin the transfer of assets (money for items). When the consumer actually pays for the items, the action is completed and revenue can be properly recognized. These two steps must occur before revenue can be recognized on an income statement. Revenue recognition prevents an organization from reporting revenue while reporting the inventory sold to gain the revenue. It is also important to account for costs at the proper time as well. Period and product costs are expenses that require proper timing to be properly reported. Product costs are costs associated with the manufacturing of a product. “Since these costs are often treated as inventory and do not appear on a company’s income statement until the final product is sold, you may sometimes see these referred to as “inventoriable costs” (Investopedia, 2014). Product costs consist of materials used …show more content…
Leaders and investors can use them to compare companies to determine which is performing at a higher level. To gain further knowledge about income statements, one merely needs to locate annual reports on an organization’s website. Apple and Samsung are electronics companies that compete with each other on many items. Cell phones, computers, and tablets are examples of items that these companies try to outperform each other to gain a stronger foothold in the market. Apple’s annual reports for 2016, 2015, and 2014 are readily available on its website in the investor information section titled “SEC filings” (insert link). Samsung’s annual reports for 2014 and 2013 are available on its website as well (insert link). One simply needs to search for annual reports, and the location is identified. These two organizations do not use the same reporting principles to create their financial reports. Apple uses generally accepted accounting principles (GAAP) according to its annual report while Samsung uses international financial reporting standards (IFRS). Using information provided in the respective income statements a quick comparison of annual income can be made. The following table provides a comparison of some of the items found on the income