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Income Statements
Part I
Revenue recognition is one of the crucial areas that concerns managers, auditors and regulators and other stakeholders. For managers, it is extremely important because selecting the wrong accounting method can, in some cases, result in litigation of shareholders and cause failure of stocks. In addition, revenue recognition is quite crucial because it determines when costs can be accounted. In accordance with the matching revenue, costs are to be recognized during the period in which their related revenues are accounted (Chlala and Landry 1). Therefore, revenue timing directly affects the period in which some of the costs are to be recognized. Consequently, this influences the income statement. Determination of when revenue is recorded can be defined using two accounting principles, namely accrual accounting and matching concept. Here, revenues are recognized during the time that is concerned with them being realized, which is when goods are transferred. However, this does not mean cash is received at this time.
Product expenses are confined to the direct inputs such as raw materials, labor, and manufacturing overheads amongst others that are used in the production of goods. These are the materials necessary for manufacturing or production of the goods a company trades. These products can be stored as inventory. In contrast, period costs are not associated with manufacturing of products. They are attributed to selling and administrative functions of the business, such as advertising and marketing. These expenses cannot be assigned to inventory or produced goods.
The matching concept, as it is related to accounting for revenues and inventory, states that expenses should be accounted for during the period when they are incurred. This is the same for revenues, which are accounted for when realized. This concept does not recognize when the cash is received. Whether cash is received late or early, expenses and revenues are recognized when transactions are made.
Part II
In this part, two companies, Apple and Samsung are analyzed using their 2012 and 2011 income statements. The link for Apple’s income statement is viewed from http://files.shareholder.com/downloads/AAPL/2853867852x0x444195/E7A8FE5F-8835-46AB-ACC2-6FA28DFB546D/Three_Yr_Financial_History.pdf while Samsung’s statement is viewed from http://www.samsung.com/us/aboutsamsung/investor_relations/financial_information/downloads/2013/SECAR2012_Eng_Final.pdf.
The two companies utilize different accounting conventions, where Apple employs the Generally Accepted Accounting Principles (GAAP) which are used in the United States, while Samsung uses International financial Reporting Standards (IFRS) which are employed internationally in order to allow comparison of different companies in cross borders (Shamrock 23). This is identified from the statements provided by the companies. In GAAP, required documents include the balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow as well as footnotes. On the other hand, the IFRS requires the balance sheet, income statement, changes in equity, cash flow, and footnotes. Apple provides the all the necessary documents under the GAAP while Samsung provides only those that are required by the IFRS.
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Apple |
Samsung |
||
| 2012 | 2011 | 2012 | 2011 | |
| Revenue | 156,508,000,000 | 108,249,000,000 | 187,754,283,000 | 154,048,895,000 |
| Gross profit | 68,662,000,000 | 46,818,000,000 | 69,509,553,000 | 49,348,008,000 |
| Operating expenses | 13,421,000,000 | 10,028,000,000 | 42,388,520,000 | 34,742,191,000 |
| Income before taxation | 55,763,000,000 | 34,205,000,000 | 27,929,248,000 | 16,050,712,000 |
| Net income | 41,733,000,000 | 25,922,000,000 | 22,262,426,000 | 12,845,713,000 |
Table 1. The Comparative Data for Apple and Samsung
From the table above, it is clear that both companies are doing better considering the revenues grew as well as the net profits. Although the expenses are increasing, it seems the revenue is increasing at a higher rate, which is contributing to the increase in net profit. The costs of sales are incrementing, as well as the revenue gross profit has increased, which indicates the ability of the company to sell more with fewer costs. Therefore, the increase in costs is able to achieve higher returns for the companies. This appears to be a good sign that the companies are healthy and bound to make profits in the future. However, the comparison of both shows that Apple is more profitable than Samsung is in terms of net income (Drake and Fabozzi 35).
It is very easy to collate the items of the two companies. Several trends can be discerned from the statements. One of them is that Apple has fewer costs compared to Samsung. This is identified from the fact that Apple had a higher net profit compared to Samsung that had the higher revenue than Apple did. The gross margin for Apple in 2012 is 43% while that of Samsung in the same period is 32%, which means their costs of sale are higher. The profit margins of the companies are as follows
Apple = 41,733,000,000 ÷ 156,508,000,000 × 100 = 27%
Samsung = 22,262,426,000 ÷187,754,283,000 × 100 = 12%,
which indicates that Apple is more profitable since it is able to retain 27% of its sales after all expenses are accounted for. Samsung, on the other hand, is able to retain only 12% after accounting for all the expenses.
Works Cited
Chlala, Nadi and Landry, Suzanne. Revenue Recognition: More Stringent Rules on the Horizon. iveybusinessjournal.com, December 2001. Web. December 21, 2013.
Drake P. Pamela and Fabozzi, J. Frank. Analysis of Financial Statements. New York, N.Y: John Wiley & Sons, 2012. Print.
Shamrock, E. Steven. IFRS and US GAAP: A Comprehensive Comparison. New York, N.Y: John Wiley & Sons, 2012. Print.
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