Revenue

Why worry about revenue and expense recognition?

•  Why not just recognize revenue when cash is received and expense when cash is paid?


•  It would be much easier, but would it be better?


•  Do you think nonprofits worry about revenues and expenses? Why?

2. Choose two concepts/topics you learned from the chapter that you found most interesting. Please briefly explain the concepts and why you found them to be the most interesting.

notes

Here is your reading list for this week:

Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean

Free download from Antioch University Library use your AU ID and password for access. 

• Part Two: The (Many) Peculiarities Of The Income Statement
  
  
  
  • Topic 5: Profit Is an Estimate
  
  
  • Topic 6: Cracking the Code of the Income Statement
  
  
  • Topics 7: Revenue:  The Issue is Recognition
  
  
  • Topic 8: Costs and Expenses: No Hard and Fast Rules
  
  
  • Topic 9: The Many Forms of Profit
  
  
  
  


• Part Two Tool Box:
  
  
  
  • Understanding the Variance
  
  
  • Profits at Nonprofits
  
  
  • A Quick Review: Percent of and Percent Change
  
  
  
  


• Study Notes and Reflection


• Supplemental Differences Between Profit and Nonprofit Reporting: Fund Accounting


• Supplemental Nonprofit Income Statement

Lecture Notes

The income statement is also known as the Profit and Loss Statement, P&L, Operating Statement, Earnings statement, and a few other names. At its most basic, this statement is a company’s revenues, expenses, and the difference between the two. The difference is called net income.

It is important to note that revenues and profits are not the same as cash. Revenues include amounts earned which may or may not have been collected from customers yet. There could be amounts that customers had paid at an earlier time but have just been earned. There could be estimates and assumptions included as well.

Expenses are not necessarily amounts that have been paid. They include expenses that have been incurred but may be paid later. There may also be amounts that were paid in an earlier time-period but are now being recognized due to the matching of revenues and expenses. Estimates and assumptions are also present in expenses.

Net income is sometimes called the bottom line. It is revenues minus expenses. If expenses are more than revenues, it is called net loss. There may be important subtotals presented in the income statement such as gross profit. This subtotal is sometimes called the line. Gross profit is net sales minus cost of goods sold. Cost of goods sold are costs or expenses directly related to sales such as direct labor, direct materials and overhead.

Each statement will have a heading. It includes the company name, statement name and the time-period covered. An income statement covers a span of time. It is usually a company’s fiscal year but can be for shorter periods such as a month or quarter (three months).

Weekly Commentary:

The section outline below highlights the main points of each section of your text, Financial Intelligence, and provides some additional commentary. It is a a good idea to read both for the best understanding possible.

Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean

Part Two: The (Many) Peculiarities of the Income Statement

5.    Profit Is an Estimate

a.    Matching Principal – Matching expenses with the associated revenue.

b.    Profit / income is not the same as cash.

c.    There are estimates and assumptions included in the figures presented on the income statement.

6.    Cracking the Code of the Income Statement

a.    Income Statement = Profit and Loss Statement = P&L Statement = Operating Statement = Statement of Operations = Statement of Earnings = Earnings Statement

b.    Revenues – Expenses = Net Income (if revenues are more than expenses) or Net Loss (If expenses are more than revenues)

c.    Consolidated indicates a statement that combines figures for a main/parent/holding company and subsidiaries. Subsidiaries are companies that are owned or partially owned by a parent company.

d.    A heading for an income statement usually contains the company name, the statement name and the time period covered. An income statement covers a time span. The most common are: month, quarter and year.

e.    Most statements round numbers to the nearest dollars. Some round off in millions and in thousands. In these situations, there will be a note.

f.     GAAP: Generally Accepted Accounting Principles: Accounting guidelines for recording and generating financial information.

g.    Non-GAAP or modified statements means there are departures from GAAP.

h.    Pro-forma – statements showing figures projecting the future.

i.     Comparative statements present the current year and one or more prior years for comparison. May show percent or dollar change as well. May show percent of sales.

j.     Percent of sales figures is a way to adjust for scale or magnitude.

k.    Footnotes – an important part of statements that provide full disclosure.

l.     Variance = difference

7.    Revenue: The Issue Is Recognition

a.    Sales = revenue (and sometimes income)

b.    Revenue is recognized when earned not necessarily when payment is received. This can be harder than it sounds.

c.    EPS – Earnings Per Share: Net income – (preferred dividends) / weighted average number of common shares

d.    Materiality: this would be an amount that would make a decision maker change their mind if the amount was missing or misstated.

e.    Channel stuffing: shipping a lot of product even though it has not been ordered.

f.     Backlog/bookings: sales not yet recognized.

g.    Deferred revenue: not a revenue yet but a liability.

8.    Costs and Expenses: No Hard-and-Fast Rules

a.    COGS – Cost of Goods Sold or COS – Cost of Services – costs directly related to sales or service (material, labor, overhead)

b.    The line = gross profit. Gross profit = net sales – COGS or COS

c.    Operating expenses = S, G & A (Sales, General and Administrative expenses). Costs not directly related to the product or service being sold.

d.    R&D = research and development)

e.    Variable cost varies or changes in direct proportion to the volume of sales

f.     Fixed cost remain relatively the same when the volume of sales changes.

g.    Depreciation – the rational allocation of the cost of a fixed (tangible) asset over its estimated useful life. There are several different methods.

i.     Straight line: (cost – salvage or residual value)/useful life)

h.    Amortization: the rational allocation of the cost of an intangible asset over it useful life.

i.     Revenue – COGS = Gross profit – Operating expenses = Net Income

j.     Economic depreciation and accounting depreciation are not the same.

k.    Other income and expenses

l.     The big bath: one-time charges, extraordinary items, write-offs, write-downs, restructuring charges

m.  Tracking Expenses Differently Depending on Who’s Looking

n.    Internal vs. external reporting, financial vs. managerial