The traditional income statement

A traditional income statement contains several blocks of revenue and expense information, which are organized as follows:

The traditional income statement approach is the dominant format used by nearly all companies, because it is required by the accounting standards for the reporting of financial results to outside parties. Because the traditional income statement involves the use of cost allocations within the cost of goods sold block of information, it can be difficult to determine which costs vary with changes in sales.

An alternative format is the contribution margin income statement, in which variable expenses are aggregated into what would have been the cost of goods sold block in a traditional income statement. All other costs, which should be fixed costs, are aggregated into a block that is positioned below the contribution margin line. The result in the net income line is the same, no matter which format is used.

The contribution margin approach can be of use for internal reporting, when a company wants better visibility into the results of its operations and how its net income will vary in response to different changes in revenue levels.

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The Income Statement