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The first and most important part of an income statement is the line reporting sales revenue. Businesses need to be consistent from year to year regarding when they record sales. For some business, the timing of recording sales revenue is a major problem, especially when the final acceptance by the customer depends on performance tests or other conditions that have to be satisfied. For example, when does an ad agency report the sales revenue for a campaign it’s prepared for its client? When the work is completed and sent to the client for approval? When the client approves it? When the ads appear in the media? Or when the billing is complete? These are issues a company must decide on for reporting sales revenue, and they must be consistent each year, and the timing of reporting should be noted on the financial statement.

The next line in an income statement is the cost of goods sold expense. There are three methods of reporting cost of goods sold expense. One is called “first in-first out” (FIFO); another is the “last in-last out” (LIFO) method and the last is the average cost method. Cost of goods sold expense is a huge item in an income statement and how it’s reported can make a substantial impact on the reported bottom line.

Other items in an income statement include inventory write-downs. A business should regularly inspect its inventory carefully to determine any losses due to theft, damage and deterioration, and to apply the lower of cost or market (LCM) method. Bad debts are also an important component of the income statement. Bad debts are those owed to a business by customers who bought on credit (accounts receivable) but are not going to be paid. Again the timing of when bad debts are reported is crucial. Do you report it before or after any collection efforts are exhausted?

You’ve made a decision to ditch your job and go out on your own, with your own business where you call the shots and you manage your own schedule. You’re tired of getting nowhere, working for a paycheck that is stagnant, while your boss makes all the profits. Although this stale job pays the bills, more or less, you want to be prudent and not jump the gun with a precipitous move that leaves you with no income at all. This is a wise decision.

If you want to be your own boss, you’re looking at all of the possible businesses to own that will improve both your finances and personal satisfaction. Even though you haven’t quit your day job, owning a business can be a scary proposition. The up side is that yes, you call the shots and make your own hours. The down side is that it is possible to fail. It’s readily apparent that a thorough analysis of what you want out of your own business, both in personal terms and financially, is a prerequisite. Where do you start?

When considering businesses to own where you’re running the show, your first consideration should be to seek a business you’ll truly enjoy. When you enjoy what you do, your chances at success are far better than when you’re conducting business in a field where you’re just lukewarm. Think about it. You must feel only a ho-hum attachment to your current line of work, or you wouldn’t be so dissatisfied. You definitely don’t want to jump out of the frying pan into the fire, so to speak. If you love what you do, success tends to follow.

However, financial success is one of your objectives, but you must balance that objective with your interests. While your next door neighbor may make a ton of money in the stock market, if stocks aren’t your cup of tea, stock market ventures have no place on your short list of businesses to own. On the other hand, maybe you’re an avid cyclist and can think of nothing better than cycling and spending your time and energy on a business that allows you to converse, participate – and profit – from participating and promoting cycling events. You’ll probably do very well with a cycling shop.

Before you make any decisions or business plans, make a list of activities and subjects that turn you on, businesses where you can satisfy both your heart and financial obligations. No matter who you are or what your interests may be, there are plenty of businesses to own that are both profitable and personally satisfying. You can have it all.

Of course profit and cost of goods sold expense are the two most critical components of an income statement, or at least they’re what people will look at first. But an income statement is truly the sum of its parts, and they all need to be considered carefully, consistently and accurately.

In reporting depreciation expense, a business can use a short-life method and load most of the expense over the first few years, or a longer-life method and spread the expense evenly over the years. Depreciation is a big expense for some businesses and the method of reporting is especially critical for them.

One of the more complex elements of a an income statement is the line reporting employee pensions and post-retirement benefits. The GAAP rule on this expense is complex and several key estimates must be made by the business, such as the expected rate of return on the portfolio of funds set aside for these future obligations. This and other estimates affect the amount of expense recorded.

Many products are sold with expressed or implied warranties and guarantees. The business should estimate the cost of these future obligations and record this amount as an expense in the same period that the goods are sold, along with the cost of goods expense. It can’t really wait until customers actually return products for repair or replacement, should be forecast as a percent of the total products sold.

Other operating expenses that are reported in an income statement may also have timing or estimating considerations. Some expenses are also discretionary in nature, which means that how much is spent during the year depends on the discretion of management.

Earnings before interest and tax (EBIT) measures the sales revenue less all the expenses above this line. It depends on all the decisions made for recording sales revenue and expenses and how the accounting methods are implemented.