Accounting For Dummies. John A. Tracy. Читать онлайн. Newlib. NEWLIB.NET

Автор: John A. Tracy
Издательство: John Wiley & Sons Limited
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Жанр произведения: Бухучет, налогообложение, аудит
Год издания: 0
isbn: 9781119837541
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point, direct your attention to the five kinds of expenses in Figure 2-1. Expenses are deducted from sales revenue to determine the final profit for the period, which is referred to as the bottom line. Actually, the preferred label is net income, as you see in the figure.

      

The five expense categories you see in Figure 2-1 should almost always be disclosed in external income statements. These constitute the minimum for adequate disclosure of expenses. The cost of goods sold or cost of sales (for service companies) is just what it says: the cost of the products sold or services delivered to customers. The cost of the products or services delivered should be matched against the revenue from the sales, of course.

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      FIGURE 2-1: Income statement information components for a technology company that sells products and services.

      

A service business does not sell products; therefore, it doesn’t have the traditional cost of goods sold expense (as it is not selling any tangible goods). In place of cost of goods sold, a service business often simply refers to the direct costs as costs of sales, which generally capture labor expenses for wages, payroll taxes, benefits, and other expenses that directly vary with sales revenue. Most service businesses are labor intensive; they have relatively large labor costs as a percent of sales revenue. Service companies differ in how they report their operating expenses. For example, United Airlines breaks out the cost of aircraft fuel and landing fees. The largest expense of the insurance company State Farm is payments on claims. The movie chain AMC reports film exhibition costs separate from its other operating expenses. We offer these examples to remind you that accounting should always be adapted to the way the business operates and makes profit. In other words, accounting should follow the business model.

      Income statement pointers

      

Most businesses break out one or more expenses instead of disclosing just one very broad category for all selling, general, and administrative expenses. For example, Apple, in its 2020 consolidated income statement, discloses research and development expenses separate from its selling, general, and administrative expenses. A business could disclose expenses for advertising and sales promotion, salaries and wages, research and development (as does Apple), and delivery and shipping — though reporting these expenses varies quite a bit from business to business. Businesses do not disclose the compensation of top management in their external financial reports, although this information can be found in the proxy statements of public companies that are filed with the Securities and Exchange Commission (SEC). In summary, the extent of details disclosed about operating expenses in externally reported financial reports varies quite a bit from business to business. Financial reporting standards are rather permissive on this point.

      Inside most businesses, a profit statement is called a P&L (profit and loss) report. These internal profit performance reports to the managers of a business include more detailed information about expenses and about sales revenue — a good deal more! Reporting just five expenses to managers (as shown in Figure 2-1) would not do. Chapter 13 explains P&L reports to managers.

      The income statement gets the most attention from business managers, lenders, and investors (not that they ignore the other two financial statements). The much-abbreviated versions of income statements that you see in the financial press, such as in The Wall Street Journal, report the top line (sales revenue and income) and the bottom line (net income) and not much more. Refer to Chapter 6 for more information on income statements.

      A more accurate name for a balance sheet is statement of financial condition or statement of financial position, but the term balance sheet has caught on, and most people use this term. The most important thing is not the “balance” but rather the information reported in this financial statement.

      In brief, a balance sheet summarizes on the one hand the assets of the business and on the other hand the sources of the assets. However, looking at assets is only half the picture. The other half consists of the liabilities and owner equity of the business. Cash is listed first, and other assets are listed in the order of their nearness to cash. Liabilities are listed in order of their due dates (the earliest first, and so on). Liabilities are listed ahead of owners’ equity. We discuss the ordering of the components in a balance sheet in Chapter 7.

      Presenting the components of the balance sheet

An illustration of balance sheet information components for a technology business that sells products and services on credit.

      © John Wiley & Sons, Inc.

      FIGURE 2-2: Balance sheet information components for a technology business that sells products and services on credit.