Having a clear understanding of where to locate expenses within financial statements is crucial when conducting financial analysis. It’s essential to know where to look in order to obtain a comprehensive view of a company’s costs and expenditures.
In this article, we’ll help you understand where expenses are reported in financial statements, what types of expenses should be included, and give you examples to make it easy to understand.
Where to Find Expenses in Financial Statements?
To obtain a clear picture of a company’s financial situation, it’s important to locate and review its expenses, which are reported on the income statement. Also referred to as the statement of income or the statement of operations, the income statement summarizes the organization’s revenue and expenses that are related to a specific period typically 12 months. By analyzing this statement, you can assess the company’s profitability, performance, and financial health.
In the income statement, expenses are typically presented as a list, with the total amount of expenses subtracted from the total revenue to arrive at the net income or net loss for the period.
Typically, expenses are categorized by function and formatted in the financial statements in a balanced way. Firstly, you need to account for expenses related to the cost of goods sold followed by selling and admin expenses ultimately wrapping the statement with interest expenses.
For example, let’s say a company generates $1,000,000 in revenue for the year and has the following expenses:
- Cost of goods sold: $300,000
- Selling and administrative expenses: $400,000
- Interest expense: $50,000
- Depreciation expense: $30,000
- Income tax expense: $70,000
The company’s income statement would look like this:
| Revenue | $1,000,000 |
|---|---|
| Cost of goods sold | $300,000 |
| Selling and administrative expenses | $400,000 |
| Interest expense | $50,000 |
| Depreciation expense | $30,000 |
| Income tax expense | $70,000 |
| Net income | $150,000 |
What Types of Expenses Should Be Included in Financial Statements?
When you examine a company’s financial statements, it’s essential to locate all the expenses that were incurred during normal business operations. These expenses may include costs directly related to producing and delivering goods or services, which are categorized as the cost of goods sold.
Additionally, you’ll find indirect expenses such as salaries, rent, and utilities, categorized as selling and administrative expenses. Interest expense, which is the cost of borrowing money, must also be reported, as well as depreciation expense, which represents the cost of using fixed assets like buildings and equipment over their useful lives.
Finally, to gain a complete view of a company’s financial performance, you should review the income tax expense, which represents the amount of taxes owed to the government.
| Type of Expense | Description |
|---|---|
| Cost of goods sold | Direct costs associated with producing and delivering goods or services |
| Selling and administrative expenses | Indirect costs associated with running the business |
| Interest expense | Cost of borrowing money |
| Depreciation expense | Cost of using fixed assets over their useful lives |
| Income tax expense | Amount of taxes owed to the government |
Final Thoughts
In the financial statements of a company, expenses hold a significant position and are usually presented in the income statement.
These expenditures encompass all the costs that are typically incurred while conducting business, including but not limited to the cost of goods sold, selling and administrative expenses, interest expenses, depreciation expenses, and income tax expenses.
By understanding where to find expenses and what types of expenses to include, you can better understand a company’s financial performance.
