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Financial managers can do certain things to increase or decrease net income that’s recorded in the year. This is called profit smoothing, income smoothing or just plain old window dressing. This isn’t the same as fraud, or cooking the books.
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So what goes on the accounting and bookkeeping departments? What do these people do on a daily basis?
Well, one thing they do that’s terribly important to everyone working there is Payroll.
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It might seem obvious, but in managing a business, it’s important to understand how the business makes a profit. A company needs a good business model and a good profit model.
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The price/earning (P/E) ratio is another measurement that’s of particular interest to investors in public businesses. The P/E ratio gives you an idea of how much you’re paying in the current price for stock shares for each dollar of earning. Earnings prop up the market value of stock shares, not the book value of the stock shares that’s reported in the balance sheet.
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While some lines of an income statement depend on estimates or forecasts, the interest expense line is a basic equation.
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Lawsuits and other legal actions can cause extraordinary losses or gains as well. If you win damages in a lawsuit against others, then you’ve incurred an extraordinary gain. Likewise if your own legal fees and damages or fines are excessive, then these can significantly impact the income statement.
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Accounting fraud is a deliberate and improper manipulation of the recording of sales revenue and/or expenses in order to make a company’s profit performance appear better than it actually is.
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Most audit reports on financial statements give the business a clean bill of health, or a clean opinion. At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon
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Of course profit and cost of goods sold expense are the two most critical components of an income statement, or at least they’re what people will look at first.
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The first and most important part of an income statement is the line reporting sales revenue. Businesses need to be consistent from year to year regarding when they record sales.
