3.15: Income Statement: Service vs. Retail vs. Manufacturing

As companies evolve, their income statements adapt to reflect the changing nature of operations, while still adhering to a consistent structure comprising revenues, expenses, and net income. The specific treatment of these elements varies significantly depending on whether the business model is service-based, retail-oriented, or manufacturing-intensive.

Service-Oriented Business: Simplicity in Revenue and Costs

Consider a graphic design agency in its initial phase. Its income statement primarily records service revenue from client projects. The direct costs are limited to designer salaries and software subscriptions. Since the agency does not handle physical products, there is no cost of goods sold or inventory accounting involved. Operating expenses are minimal and mostly include utilities, office rent, and administrative wages.

Retail Expansion: Introducing Inventory and Cost of Goods Sold

As the agency diversifies by opening an online store selling design templates and branded merchandise, the income statement becomes more layered. Revenue streams now include product sales, and a cost of goods sold (COGS) section emerges. This includes the cost of printing, packaging, and shipping the merchandise. Inventory management becomes essential, and operating expenses expand to cover e-commerce platform fees, customer support salaries, and digital marketing.

Manufacturing Operations: Complex Cost Allocation

Further growth might lead the business to manufacture its own merchandise in-house. In this scenario, the income statement must reflect manufacturing costs. The COGS section now includes:

Raw materials, such as textiles or printing inks

Direct labor, representing wages paid to factory staff

Manufacturing overhead, which includes depreciation of production equipment, factory rent, and utility costs

These costs require systematic allocation methods to ensure accurate matching with revenue.

Across all stages, the structural integrity of the income statement is maintained. However, the classification and depth of financial data evolve, offering a more comprehensive picture of how the business generates income and incurs costs across different operational models.

An income statement includes three core elements, namely revenues, expenses, and net income.

However, the treatment of these items varies according to the business type.

Consider Fitter, a business that began as a personal training service.

At this stage, its income statement reported service revenues along with direct service costs such as trainers’ wages and facility rent.

As Fitter expanded into retail by selling fitness equipment, the income statement evolved to include a cost of goods sold section based on inventory consumed.

Operating expenses also included retail staff wages and store rent.

Later, Fitter launched a manufacturing unit for fitness equipment, which made the income statement more detailed.

It included the cost of manufactured goods, covering raw materials like steel and foam, direct labor for factory workers, and overhead such as equipment depreciation.

While Fitter’s operations evolved from service to retail to production, the income statement retained its core structure.

Each version of the income statement told the financial story of the business, shaped by how Fitter earned revenue and incurred costs.