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Revenue & Gross Profit

Financial Statements

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Every business survives based on sales. If a firm has no sales that firm has no income. A company must have sales revenue coming in, and it subtracts the cost of making goods they’ve sold. The result is gross profit. You should prefer to see revenue and gross profit trending upwards.

Sales Revenue (Gross Versus Net)

Sales revenue lists the gross income that is earned as a result of business operations. This isn’t profit, this is income from sales before any expenses are subtracted or any bills have been paid. In order to correct sales revenue, expenses are subtracted from the income until they arrive at retained earnings. The lesser the expenses a company has the greater the profit.

There are issues with even the most basic revenue statements when comparing across companies. Sales revenue changes whether companies show gross revenue or net revenue. Gross revenue is sales revenue before returns from customers, as well as the possibility of sales taxes. Net revenue is sales revenue with a deduction of returns from customers and sales tax if applicable. Many companies also vary in what they recognize as a sale, which changes when the sale is made. A firm which marks a sale when the order is made will have a different amount of listed sales than firms marking sales when cash is received. The variations of these possible choices are known as Revenue Recognition. A company’s preference for recognition can usually be found in the Income Statement footnotes.

Cost of Goods Sold

The Cost of Goods Sold (Also Cost of Revenue or Cost of Sales) is the costs directly associated with the manufacturing of a product or service. This includes all directly associated materials, labor directly related to the product’s creation, and directly associated overhead costs. You should always look into the notes to see what exactly management is listing as a cost of goods sold. Rather obviously, a strong company can manufacture a product at the same quality level as its competitor at lower costs. If two companies are producing products at the same product quality, but one spends far less than the other on the cost of goods sold, you should be curious why. It’s easy for a company to spend less on the cost of goods sold while producing low-quality products in comparison. It is difficult for a company to match or exceed quality while spending less on the cost of goods sold. Any firm capable of achieving this feat has a strong advantage over competitors.

Gross Profit

Gross profit is sales revenue with the cost of goods sold subtracted from its value. This reveals the profit after the manufacturing, distribution, and sales process is complete. This does not take into account many of the other expenses that a company must occur in the business process. Stronger companies have higher gross profits relative to their competitors since they can make goods cheaper (at the same quality levels) than their direct competitors. Organization structure and function determines whether or not companies can actually manage this feat and outpace businesses within their industry. However, businesses with the strongest margins can be ruined by an extremely high amount of operating expenses.

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