Many of the companies we meet do themselves a disservice by the way they construct their financial statements. Clearly, accounting rules and practices apply, but accounting also leaves much to be decided by each company. As a result, many firms put costs and expenses in different places on the income statement. For smaller companies, the practices embraced by large corporations set a standard for smaller companies to follow. This assures these smaller companies that when they decide to sell, their financial statements will present their company in the best and most acceptable manner. The below income statement was from a manufacturing company, a distributor would normally have tighter margins.
* On an internal income statement each expense category should be listed.
Commissions and freight out should be a selling expense, while labor and plant overhead should be included in cost of sales. This is fairly standard in the food industry and consequently, it is expected. It is important to note, that while gross profits are higher, there is no change in operating profits. However, the company’s financial statements are more attractive and less difficult to analyze for prospective acquirers.
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