Saturday, August 17, 2013

Revenue Redundancy?

I had a quiz in my first term as a grad student. Quizzes for the most part were pretty basic, really just a check to make sure the class was doing the reading and coming prepared for class. Well this one sent me for a little bit of a loop because of vernacular. Here is the question I have for you, What is income? Wait, before you answer, What is Revenue? Hold on I'm still going, What is Earnings? One more, What is Profit? Ok go. The problem I stumbled on used earnings and income as synonyms, meaning they mean same thing (for those Busy Season-ers).  Got you there, huh?

Here is the issue, there is really no nomenclature or system of naming (I got your back BS'rs - See what I did there?) for accounting. Absolutely there are hard and fast definitions in regulation for some terms, but that doesn't really apply here. So here is what I was taught and what up until that quiz had served me well.
Revenue:
Probably the easiest of the group. This is inflows of money that is the result of the normal course of business for the company. Money from hamburgers if you are McDonalds. Pretty straight forward. What if McDonalds sells a fryer and makes money? That would be a gain not revenue.

Gains:
A little more abstract. This is pretty much everything else that is not lumped into the normal course of business. Things like selling a plant or equipment or investment gains. No need to be overly technical, if you sell it for more than it is on your book for then you have a gain.

Income:
One of the more difficult to nail down. Income is revenue that has either had something taken out or something added.  Net income for example has all expenses removed and net income from operations has only operating expenses removed. EBIT, EBITDA and Non-operating income are other examples.

Profit:
This is a good example of the problem I encountered. Profit can mean the same thing as net sales or net revenue, or total sales minus sales returns. Profit in use, nearly always means gross profit or net sales minus cost of goods sold.

Earnings:
This is the same as net income right? I would say yes. I mean, does retained earnings increase by net income (for those BS'rs)? No, from net income you remove some things, like dividends or consolidating items, to get net earnings which then increases retained earnings. Earnings would be the bottom line item.

So what is the gist of all this? 

Revenue → Gross Profit→Net Income → Net Earnings 

Simple.

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