Evaluate the elements of a typical income statement

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1. Evaluate the elements of a typical income statement and explain which is most likely to present challenges and why.

The typical income statement includes the company's gross revenues (at the very top), followed by the cost of goods sold. The cost of goods sold (also referred to as the cost of goods manufactured) is subtracted from the gross revenue, to calculate the company's gross profit. Directly under the gross profit, the company lists their expenses. The expenses are listed by category, and by account number. Generally, operating expenses that directly stem from production (like supplies, equipment maintenance, and so forth), are listed first, followed by other grouped expenses. The additional groups of expenses would include salaries, employee benefits, health insurance, factory insurance, and various other groups, as determined by the individual company. A total is then calculated for the expenses. The total expenses is subtracted from the gross profit, to arrive at the company's net income, which is located at the very bottom of the income statement.

The elements that are most likely to present challenges are proper expense classification, and the proper recognition of revenue. Revenue recognition is a hot topic in the accounting field. Companies oftentimes either intentionally manipulate the timing of their revenue recognition to boost revenue just before the end of a quarter, or they unintentionally adjust gross revenue incorrectly, which presents a challenge for managers and executives within the company. The other main challenge is the classification of expenses, and ensuring that expenses meet the relevancy and timing criteria. Expenses that are recognized but should not be (because the goods ...