A classified income statement should include the company’s cost of goods sold, as well as amounts spent on operating expenses.
A classified income statement is a financial document that shows the income earned by a business over a period of time and separates the individual aspects of the business in the document. This makes it easy for management, shareholders, and potential investors to digest the information easily. It also allows these statistics to be compared with commercial competitors or with the previous performance of the company itself, as well as statistics for the calculation of financial indices. Generally, the classified income statement is broken down into sales and service revenue on the positive side and cost of goods sold, operating expenses, and other expenses on the negative side.
When a corporation is owned in part by the public and is accountable to its shareholders, it must prepare financial statements. These statements are detailed financial records of the company for a certain period of time. The two main types of these statements are balance sheets, which show a company’s assets and liabilities, and income statements, which refer to the income a company generates through its business. A classified income statement separates each statement item into individual parts.
The classified income statement typically begins with the revenue earned by a business through sales or services. This amount is the total from which all expenses on the report will be subtracted. Chief among these expenses is cost of goods sold, a figure that can be obtained by checking inventory totals and accumulating all the money used to purchase inventory.
In addition to cost of goods sold, the classified income statement must also include amounts spent on operating expenses. These expenses combine selling expenses directly during the sales of a company’s products and administrative expenses related to the general day-to-day operations of the business. Other miscellaneous expenses, such as interest expense and dividends, should be the last part of the statement.
It is crucial, when preparing a classified income statement, that all of these disparate items have their own space on the statement so that they can be easily studied. By framing the statement in this way, a company can see how it compares in relevant areas of the business against competitors, as well as its own past performance. Also, separating statistical information in this way makes it easier to formulate financial ratios, which combine two aspects of a company’s business to create a useful index for evaluating the business.