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Financial statement analysis

Revenue is a crucial part of financial statement analysis. The companys performance is measured to the
extent to which its asset inflows (revenues) compare with its asset outflows (expenses). Net income is the
result of this equation, but revenue typically enjoys equal attention during a standard earnings call. If a
company displays solid top-line growth, analysts could view the periods performance as positive even if
earnings growth, or bottom-line growth is stagnant. Conversely, high net income growth would be tainted
if a company failed to produce significant revenue growth. Consistent revenue growth, if accompanied by
net income growth, contributes to the value of an enterprise and therefore the stock price.
Revenue is used as an indication of earnings quality. There are several financial ratios attached to it, the
most important being gross margin and profit margin. Also, companies use revenue to determine bad debt
expense using the income statement method.
Price / Sales is sometimes used as a substitute for a Price to earnings ratio when earnings are negative
and the P/E is meaningless. Though a company may have negative earnings, it almost always has positive
revenue.
Gross Margin is a calculation of revenue less cost of goods sold, and is used to determine how well sales
cover direct variable costs relating to the production of goods.
Net income/sales, or profit margin, is calculated by investors to determine how efficiently a company turns
revenues into profits.

What is Revenue?
Recalling that revenue is income your business earns from services
provided or the sale of goods, it is also the top line of your profit and loss
statement. (This is often called "gross revenue.") From this number, your
losses (i.e., expenses) are subtracted, giving you your profit.

Different Types of Revenue


At a high level, we'll start by splitting revenue into "operating" and "nonoperating." Operating revenue is much like we've already described:
income from sales, services provided, etc. It's the money you earn from the
core activities of your business. Non-operating revenue can be thought of
as income on the side, perhaps passive. It's money earned that falls

outside your business' core offerings. And this is where the different types
of revenue come in to play...

Rent
Unless you're in the business of renting property (in which case, rent
income would absolutely be considered operating revenue), rent income is
typically considered non-operating revenue.

Interest
If your business holds investments that earn interest, that interest earned is
considered non-operating revenue. Debt owned is a good example. (Again,
if your business is in the business of owning debt, then the interest you
earn on that would be considered operating.)
Read up on the difference between good and bad debt.

Dividends
Another type of revenue is dividend revenue. If your business holds stock
in another business that pays a dividend, that would be considered nonoperating.

Royalties
Most people are familiar with this term from the entertainment business,
butroyalties are a real thing in the accounting universe too! Simply put,
royalty revenue is earned with someone else (i.e., another business or
individual) makes money off of something you produced. If you work in a
space that deals with royalties, make sure what you produce is protected
so that you actually get what you're entitled to! (Pro tip: talk to a lawyer
that's familiar with your space.)
As with all things small business, types of revenue will differ from business
to business. Take the time to map out your operating revenue and identify

whether or not you have (or perhaps one day will have) any non-operating
revenues.
Revenues are classified as operating and non-operating
revenue.
Operating revenues are those that come in to a business from the companys
main or core business activities. This is the area through which a company earns
most of its income. A software development company generates revenues by
developing software or modules. Examples of operating revenue: Sales, rental
income or providing services. Operating revenue is considered as the lifeblood of
any company, as the high amounts of operating revenue is indicative of having or
maintaining stable cash position.
Non-operating revenue or other income includes revenues earned
from a companys outside of its normal operations. These are the revenues that
are associated with secondary operations of a business entity not with main,
central or core activities. An example of non-operating revenue is the income
generated from the sale of subsidiary or division. Since its not to be sold again,
the income is a one- time occurrence. It may further be understood this way; for
example, if an institution is offering training and development services, the main
source of revenue (operating revenue) is associated with the training and
development activities being regarded as core operations of the institution. Since
the institution might receive gifts, bequests or donations, it is to be recorded as
non-operating revenue as such revenue might not be associated with the main
activities of the institution.
The common revenue accounts are as follows:Revenue/sales/fess These accounts are used to record the revenues earned
from the main activities of a business entity. It is better to assign particular
names to the accounts, so that the identification and the required analysis may be
made smoothly.

Interest revenue This revenue comes from an investment- usually from


bank.
Rental revenue it is used to record the revenue that is received by providing
rental services, such as, building, equipment etc.
Dividend revenue It is recorded when dividend on the stock is earned from
other companies that pay dividends.
In addition, it is important to mention contra revenue accounts. Contra revenue
accounts, as the name suggests, have apposite nature of accounts. They are
contrasted with revenue accounts. Such as, sales return and sales discounts. Both
are used to offset the relevant accounts or to reduce the value of the related
account. Its a way of better portraying the relationship between certain debits
and credits.