How to Read a Financial Report. John A. Tracy

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       Sales revenue: The total amount received or to be received from the sales of products (and/or services) to customers during the period. Sales revenue is net, which means that discounts off list prices, prompt payment discounts, sales returns, and any other deductions from original sales prices are deducted to determine the sales revenue amount for the period. Sales taxes are not included in sales revenue, nor are excise taxes that might apply. In short, sales revenue is the amount the business should receive to cover its expenses and to provide profit (bottom-line net income).

       Cost of goods sold expense: The total cost of goods (products) sold to customers during the period. This is clear enough. What might not be so clear, however, is the expense of goods that were shoplifted or are otherwise missing, and write-downs due to damage and obsolescence. The cost of such inventory shrinkage may be included in cost of goods sold expense for the year (or, this cost may be put in another expense account instead).

       Selling, general, and administrative expenses (operating expenses): Broadly speaking, every expense other than cost of goods sold, interest, and income tax. This broad category is a catchall for every expense not reported separately. In our example, depreciation is broken out as a separate expense instead of being included with other operating expenses. Some companies report advertising and marketing costs separately from administrative and general costs, and some report research and development expenses separately. There are hundreds, even thousands, of specific operating expenses, some rather large and some very small. They range from salaries and wages of employees (large) to legal fees (small, one hopes).

       Depreciation expense: The portions of original costs of long-term assets including buildings, machinery, equipment, tools, furniture, computers, and vehicles that is recorded to expense in one period. Depreciation is the “charge” for using these so-called fixed assets during the period. This expense amount is not a cash outlay in the period recorded, which makes it a unique expense compared with other operating expenses.

       Interest expense: The amount of interest on debt (interest-bearing liabilities) for the period. Other types of financing charges may also be included, such as loan origination fees.

       Income tax expense: The total amount due to the government (both federal and state) on the amount of taxable income of the business during the period. Taxable income is multiplied by the appropriate tax rates. The income tax expense does not include other types of taxes, such as unemployment and Social Security taxes on the company’s payroll. These other, non-income taxes are included in operating expenses.