How do companies calculate revenue?

By Chizoba Morah AAA
A:

Revenue is the amount of money a company receives in exchange for its goods and services. The revenue received by a company is usually listed on the first line of the income statement as revenue, sales, net sales or net revenue. Regardless of the method used, companies often report net revenue (which excludes things like discounts and refunds) instead of gross revenue. For example, If a company buys shoes for $60 and sells two of them for $100, and offers a 2% discount if the balance is paid in cash, the gross revenue that the company reports will be [2x$100] = $200. The company's net revenue will be equal to: [$200*0.98] = $196. The $196 is normally the amount found on the top line of the income statement.

In a financial statement, there might be a line item called "other revenue." This revenue is money a company receives for activities that are not related to its original business. For example, if a clothing store sells some of its merchandise, that amount is listed under revenue. However, if the store rents a building or leases some machinery, the money received is filed under "other revenue." Companies account for revenue in their financial statements by either the cash or the accrual method.

Revenue is very important when analyzing financial ratios like gross margin (revenue-cost of goods sold) or gross margin percentage (gross margin/revenue). This ratio is used to analyze how much a company has left over after the cost of the merchandise is removed. (For related reading, check out Analyzing A Bank's Financial Statements.)

This question was answered by Chizoba Morah.

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