Classified Income Statement

A classified income statement separates income and expenses into non-operating expenses and operating expenses. A classified income statement is used to simplify a complex income statement to make it easier for financial statement users to read. Listing all major income and expense functions in a categorized income statement facilitates analysis. A classified income statement provides a basis for analyzing a company’s performance by showing the significant relationships between items. For example, if you subtract cost of goods sold from operating profit and determine that sales exceed cost of goods sold.

The four sections of the classified income statement include: the operating revenue, cost of goods sold, operating expenses and non-operating expenses and revenues.

Operating revenue includes the gross income generated from selling goods or providing the services. The net sales are reduced by deducting the allowances, sales returns, and sale discounts.

The cost of goods sold: comprises the cost of merchandise sold and includes the cost of purchasing the goods from the manufacturer or the cost of employee services rendered for a service business (Shim & Siegel, 2008).

Operating expenses: are the resources utilized or expenses incurred in generating the revenue. They are classified into administrative and selling expenses. Selling expenses relate to the selling function and include the cost of distributing the merchandise and the costs incurred in selling the goods or providing a service. Administrative expenses are costs incurred in running the business including salaries to clerical staff, office equipment depreciation, salaries for administrative executives (Shim & Siegel, 2008).

Non-operating expenses and revenues: these are revenues and expenses that are not directly related to the primary operations of the business, for example, interest expense and interest revenue (Cunningham, 2011). These are the costs and earnings that are not tied to the operations or cost of goods sold by the business.

References

Cunningham, B. M., Nikolai, L. A., Bazley, J., Kavanagh, M., Slaughter, G., & Simmons, S. (2011). Accounting: information for business decisions. New York: Cengage Learning.

Shim, J. & Siegel, J. (2008). Financial Management. New York: Barron’s Educational Series.