Income Statement - Cost of Sales Method

The income statement represents the earnings position of the company during the fiscal year and can be presented either as a production income statement (total cost method) or as a sales income statement (cost of sales method).

Cost of Sales Method

The cost of sales method is a sales income statement where only the sold quantities are considered for the calculation of the gross result, not the produced quantities. For this reason, unlike the total cost method, the increase in stock of finished and unfinished products is not recorded as income, nor are the costs incurred booked as expenses.

Minimum Structure According to the Code of Obligations

According to Art. 959b para. 3 CO, the sales income statement must at least individually show the following items in the prescribed order:

1. Net revenues from deliveries and services
2. Acquisition or production costs of the sold products and services
3. Administrative and sales expenses
4. Financial expenses and financial income
5. Non-operating expenses and non-operating income
6. Extraordinary, one-time or non-period expenses and income
7. Direct taxes
8. Annual profit or annual loss

Additional positions must be shown individually in the income statement or in the appendix if they are essential for assessing the earnings situation by third parties or customary due to the activity of the company (Art. 959b para. 5 CO).

The Agony of Choice

Companies that align their accounting exclusively according to the provisions of the Swiss Code of Obligations have both the total cost method and the cost of sales method available (Art. 959b para. 1 CO). The accounting standards Swiss GAAP FER and IFRS also allow both statements. US-GAAP, however, mandatorily prescribes the cost of sales method.

For the cost of sales method, operational accounting is necessary to be able to demonstrate the manufacturing costs of individual products. For this reason, the cost of sales method is considered more complex than the total cost method, where the classification is by type of expense. For the recipients of the income statement, the functional breakup often provides more meaningful information.

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