Further to Part 1 where we understand what is an Income Statement. This article looks at what are inside the Income Statements:
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COMPONENTS IN THE INCOME STATEMENT: |
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Net Revenue A Cost of Goods B Gross Margin C=A-B |
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NET REVENUE: |
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NET REVENUE are the list prices of the goods and/services less any discounts offered to the customer to induce purchase. Don’t forget that these revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received which follow strictly to the matching and accrual accounting concept.
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COST OF GOODS SOLD |
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COST OF GOODS comprise the TOTAL COST OF THE PRODUCT BEING SOLD. Originally, when the manufacturer made the product, all the cost related to the product are added to the value of the inventory. When the product is sold, these costs of inventory are then expensed through the Income Statement as cost of goods sold. |
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GROSS PROFIT MARGIN |
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GROSS PROFIT MARGIN is simply Net Revenues less Cost of Goods Sold The higher the gross margin, it means that there is a higher MARK-UP on the costs of Goods Sold . Of course, a higher gross profit margin is favourable. The higher the gross profit margin, it means that the company can absorb more overheads and can sustain longer when there is a period of recession where business dropped |
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