Income Statements: Organization’s Revenue

Introduction

Revenue is the total amount of money received by an organization from the goods sold or the services it provides to its clients during a given period. Normally if all conditions are held constant, the organization’s revenue would usually comprise the total value of net sales earned, the amount of cash that flows from trading the company’s assets and any other activities that leads to change of owner’s equity like the company’s interest rates. On the income statement, the amount of revenue for the firm is calculated prior to subtracting any amount of expenditures associated to the creation of these revenues. Revenue is typically the single largest item reported in any organization’s financial statements. This is due to the fact that revenues are significant to the firms’ financial statements both in dollar terms and in the weight and importance that investors place on them in making investment decisions. In showing the amount of revenues earned or to be earned on the firms’ income statements, firms employ diverse strategies to report the earnings. However, for accounting purposes, revenues are usually recorded when they are earned by the company and not necessarily when cash is received (Walter, 2011).

The difference between Product and period expenses

Product expenses are those expenses that are normally traceable to the organizations’ manufacturing or production process. For example, the cost of the direct materials acquired and used to produce a given product and associated direct labor that incurred. These costs in most circumstances are directly proportional with production and vary with the size or volume or number of units produced as opposed with the passage of time. On the other hand, period expenses are those expenses that are usually incurred during a given period and they are not easily traceable with products or the production process. Typical examples for this expense are salaries paid to sales personnel, administrative expense like monthly salaries paid to management personnel who oversee the smooth running of the entire organizational activities, monthly rent on the factory and taxes among many others (Walter, 2011).

The matching concept

This is an accounting principle, which provides guidance in determining when a cost should be recognized. To measure the profitability of an economic entity according to the concept, revenues should be matched against costs associated in generating this revenue. The matching of business enterprise’s expenses that is the cost of goods and services used to obtain revenue with its revenue is the primary activity in the measurement of the results of operations for that period. Some costs, such as the cost of inventory sold can easily be matched with the related revenue earned from the sale of the inventory. Other costs have no direct connection with revenue. The matching concept provides a systematic policy to allocate these costs reasonably against the associated revenue (Walter, 2011).

Comparison of Apple Inc. and Philips companies’ income statement items for the years 2010 and 2011

According to the published Form 10-K Annual Report by Apple Inc. (2012), Apple Inc. Company prepares its financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (GAAP). On the other hand, Philips Company prepares its financial statements in accordance with International Financial Standards (IFRS) as adopted by the European Union (Philips Company, 2012). The following table compares six items located randomly from the consolidated income statements for the years 2010 and 2011 for the Apple Inc. and the Philips companies.

Apple Inc. Company
Item 2010 2011 Increase(Decrease) % change
Net sales $ 65,225 $ 108,249 $ 43, 024 65.96 %
Cost of sales $ 39,541 $ 64,431 $ 24, 890 62.95 %
Gross margin $ 25,684 $ 43,818 $ 18, 134 70.60 %
Research and development $ 1,782 $ 2,429 $ 647 36.31 %
Operating income $ 18,385 $ 33,790 $ 15, 405 83.79 %
Net income(loss) $ 14,013 $ 25,922 $ 11, 909 84.99 %
Philips Company
Item 2010 2011 Increase(Decrease) % change
Sales € 22, 287 € 22, 579 € 292 1.31 %
Cost of sales € 13, 191 € 13, 932 € 741 5.62 %
Gross margin € 9, 096 € 8, 647 (€ 449) – 4.94 %
Research and development € 1, 493 € 1, 610 € 117 7.84 %
Income from operations € 2, 080 (€ 269) (€ 2, 349) – 112.93 %
Net income(loss) € 1, 452 (€ 1, 291) (€ 2, 743) – 188.91 %

From the table above, it is evident that the selected items for Apple Inc. Company generally increased their values between the two years under consideration. The value of net sales increased by $ 43, 024 million which represents 65.96 % increase while the costs of sales increased by $ 24, 890 million representing 62.95 % increase. Equally, the company’s gross margin increased by 70.60 %, the research and development expenses incurred by the company increased by 36.31 %, and its operating income and net income rose by 83.79 % and 84.99 % respectively between the years 2010 and 2011. Based on this information, it is clear that although both revenues and expenses of the company increased between the two years, the proportionate change in revenues was higher as compared to the changes in expenses incurred to generate the revenues hence resulting to a good net income. This therefore shows that the company is doing better.

For Philips Company, the items selected for comparison from years 2010 and 2011 income statements indicate both an increase and a decrease in their values. The company’s sales, cost of sales, and research and development expenses increased by 292, 741 and 117 millions of Euros respectively. This represents an increase of 1.31 %, 5.62 % and 7.84 % respectively. On the other hand, the firm’s gross margin decreased by 449 millions of Euros which represents 4.94 % decrease. The company’s income from operations and net operating income decreased by 2, 349 and 2, 743 millions of Euros which represents a decrease of 112.93 % and 188.91 % respectively. From this information, it is clear that Philips Company’s expenses increased at a higher rate compared to the revenues they generate for the company hence resulting to a net operating loss. This therefore shows that the company is doing worse.

In conclusion, it is easy to discern trends or compare the information from year to year and between the two companies because the companies have consistently followed the internationally acceptable standards and format in preparing their annual reports. For example, in both companies, sales appear as the first item in their respective income statements and they clearly indicate proper methodologies for reconciling differences.

References

Apple Inc. (2012). Investor relations – Financial history. Retrieved on April 26, 2012 from investor.apple.com/ – United States.

Philips Company (2012). Investor Relations – Financial results. Web.

Walter, L.M. (2011). Principles of Accounting: A Complete Online Text, chapter 3. Web.

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