Parts of an Income Statement, part 1

Parts of an Income Statement, part 1The first and most important part of an incomestatement is the line reporting sales revenue.Businesses need to be consistent from year to yearregarding when they record sales. For somebusiness, the timing of recording sales revenueis a major problem, especially when the finalacceptance by the customer depends on performancetests or other conditions that have to besatisfied. For example, when does an ad agencyreport the sales revenue for a campaign it'sprepared for its client? When the work is

completed and sent to the client for approval?When the client approves it? When the ads appearin the media? Or when the billing is complete?These are issues a company must decide on forreporting sales revenue, and they must beconsistent each year, and the timing of reportingshould be noted on the financial statement.The next line in an income statement is the costof goods sold expense. There are three methods ofreporting cost of goods sold expense. One iscalled \"first in-first out\" (FIFO); another isthe \"last in-last out\" (LIFO) method and the lastis the average cost method. Cost of goods soldexpense is a huge item in an income statement andhow it's reported can make a substantial impacton the reported bottom line.Other items in an income statement includeinventory write-downs. A business shouldregularly inspect its inventory carefully todetermine any losses due to theft, damage and

deterioration, and to apply the lower of cost ormarket (LCM) method. Bad debts are also animportant component of the income statement. Baddebts are those owed to a business by customerswho bought on credit (accounts receivable) butare not going to be paid. Again the timing of whenbad debts are reported is crucial. Do you reportit before or after any collection efforts areexhausted?