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Income Statement Presentation Issue (US GAAP)
09-15-2014, 01:39 PM
Post: #1
Income Statement Presentation Issue (US GAAP)
Hello Everyone,
So, a company receives pre-payments from customers, every year in the beginning of the season. The money sits in the bank account and earns interest on it. To be fair the company offers back this interest earned in the form of sales discount when the sale is made. To record this whole process, The sales discount offered to customers becomes part of Cost of Sales (COS) and bring down the $ GM line. After the $GM line there are operating expenses. Then comes Earning before Interest Tax Depreciation and Amortization (EBITDA). After the EBITDA comes "Unusual income earned". This unusual income is the interest that was earned on customer pre-payments. The amount is material. So, on one side the company's $GM is effected negatively every time income statement is prepared, on the other hand the if you think of it "Unusual income" is not really "unusual" because it happens every year and is not a one time thing. Following is the income statement (A) is how it is presented now. (B) how the company wants it to be presented.
(A)
Sales
- (Cost of Sales)/ Prepayment Discount
= GM
- Operating Expenses
= EBITDA
+ Unusual income (Interest Earned)
- Tax
= Net Income

(B)
Sales
- (Cost of Sales)/ Prepayment Discount
= GM
- Operating Expenses
+ Unusual income (Interest Earned)
= EBITDA
- Tax
= Net Income

The senior management looks at the (EBITDA) number to see how the company performed every month/quarter/year. Is it possible to include the "Unusual income (Interest Earned)" to make part of operating expenses and call it "Bank Fees" and bring down the operating expenses, since interest earned helps the company year after year. Any thoughts on this, would be greatly appreciated.

Thank you everyone.
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09-19-2014, 12:00 PM
Post: #2
RE: Income Statement Presentation Issue (US GAAP)
Why do you want to offset interest earned against bank fees?
Is it because you want to mask the actual cost of bank frees/interest charges?

The purpose of the classification is to show the actual amount earned through operating expenses.
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09-21-2014, 05:45 AM
Post: #3
RE: Income Statement Presentation Issue (US GAAP)
(09-19-2014 12:00 PM)Aida Howard Wrote:  Why do you want to offset interest earned against bank fees?
Is it because you want to mask the actual cost of bank frees/interest charges?

The purpose of the classification is to show the actual amount earned through operating expenses.

Hello Aida,
Thanks for the reply. "Bank fees" account will show the amount of interest earned. This account will be part of operating expense section, but with a credit balance. So overall operating expenses will get offset by this "bank Fees" account. The overall purpose of bringing "interest earned" above the EBITDA line is to show that the interest we earn every year is part of our operations. Currently it sits below the EBITDA line as "Unusual income". So reader of the financial statements sees the "interest Earned" as a unusual occurrence. Which is not true, since we earn interest every year. I am just wondering if the auditors will raise concerns if we included interest earned above EBITDA line.

Thanks
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