Question

Philip and Ella are having the following conversation:

Philip: How can you compare the financial performance of businesses?

Ella: You can look at the Income Statements of businesses.

Philip: Hum……are the measurement bases of Income Statement items identical for all businesses?

Ella: not sure…..

Requirement:

Explain possible reasons (with two examples) of how items in the Income Statements of similar businesses may be measured differently?

Answer 1

Income statement is one of the four primary financial statements with public companies must publish every quarter and year.

• It reports transactions totals in the firm's revenue and expens accounts for the period.
• It enabling direct calculation of the firms earnings (profit).
• Also called profit and loss account.

There are different items for measuring companies performance.

1. Cost of goods sold(cost of producing goods or service)
2. Operating expense- selling expense (cost of selling the goods or service)
3. Operating expenses- General & administration expenses (Overhead, supports, & management cost from across the company)
4. Depreciation - Depending on the use of assets.
5. Liquidity, profitability and valuation of company etc.
6. Extraordinary items (gains or losses).

Example 1

If net income increases owner's income also increased. Retained earnings from net income is increase owner's value by increase owner's equty. Also net income distribued as dividend.

Example 2

Cost of goods sold is a cost of producing goods or service, it reflects the companies efficiency in production in case of low cost.