A classified income statement is a financial document that shows the income earned by a company over a period of time and separates the individual aspects of the business on the document. This makes it easy for management, shareholders, and potential investors to digest the information easily. It also allows these statistics to be compared to business competitors or the company's own past performance, as well as facilitating the calculation of financial ratios. In general, a classified income statement is broken down into the revenue from sales and services on the positive side and the cost of goods sold, operational expenses, and other expenses on the negative side.
When a corporation is owned in part by the public and is responsible to its shareholders, it must prepare financial statements. These statements are detailed financial records of a company over a set period of time. The two main types of these statements are balance sheets, which show a company's assets and liabilities, and income statements, which are concerned with the income that a company brings in through its business. A classified income statement separates each element of the statement into individual parts.
The classified income statement generally begins with the revenue earned by a company through sales or services. This amount is the total from which all of the expenses on the report will be subtracted. Chief among these expenses is the cost of goods sold, a number that can be attained by checking inventory totals and amassing all of the money used to purchase inventory.
In addition to the cost of goods sold, a classified income statement should also include the amounts spent on operational expenses. These expenses combine the selling expenses amassed directly during the sales of a company's products and the administrative expenses involved with the general day-to-day operations of the business. Other various expenses, such as interest expenses and dividends, should be the last part of the statement.
It is crucial when preparing a classified income statement that all of these disparate elements be given their own space on the statement so that they can be studied with ease. By framing the statement in this manner, a company can see how it stacks up in pertinent areas of the business against competitors as well as its own past performance. In addition, having the statistical information separated in this manner makes it easier to formulate financial ratios, which combine two aspects of a company's business to create a ratio useful for business assessment.