Procter and Gamble; Costs, Income Statement and Balance Sheet

Proctor & Gamble accounts show a number of different types of expenses. Expenses can be generally divided into two broad categories; operating expenses and capital expenses.

Capital expenditure will usually be seen on the balance sheet, as a capital expenditure results in the creation of acquisition of a capital asset. Capital expenditure is usually classified as any asset that is expected to have a life of more than 12 months (Revsine et al., 2011). Under the matching convention these costs will then be depreciated over the assets' useful lifetime, with each year's share of the deprecation being expensed to the income statement (Revsine et al., 2011). For example, on the Proctor & Gamble 2014 the balance sheet shows an increase in the net book value of property plant and equipment, rising from $21,666 million in 2013, to $22,304 million in 2014, indicating that there has been capital expenditure in 2014. This is confirmed with the cash flow states, where there is capital investment of $3,848 million recorded, and note three which shows an increased value in the property holdings and the plant and machinery book value.

The operating expenses are costs that are incurred as a result of operations, and are shown on the income, or profit and loss, sheet which are examined. Operating costs may be divided into two general categories; fixed costs and variable costs. Fixed costs across but will remain the same because this is a level of production, whereas variable costs will change with each unit produced. The operating costs shown include the cost of goods sold, which is a variable cost and will include the direct materials (and labor) that are used to manufacture the goods. The operating costs will also include fixed costs, such as property costs, admin costs and advertising. The costs, such as the cost of the property are fixed costs, costs such as marketing and admin labor may be seen as semi-variable, as they may not change based on each unit produced, but they may vary depending on the overall level of production. A major sales and admin cost is the marketing. The costs in the income sheet will also include the deprecation cost for capital assets, both tangible, such as property, and intangible, such as good will.

Question 2

An examination of the income statement and the balance sheet shows a firm that is growing and in 2014 was able to increase its' overall sales and operating efficiently despite increased cost for the direct inputs (cost of products sold). The revenues increased from $82,581 million in 2013 to $83,062 million in 2014. The cost of goods increased, in 2013 it was 50.12% of the net revenue, and in 2014 it was 51.11%. However the firm found efficiencies elsewhere as the cost of the selling and admin fell despite the increase in the net revenues falling from $26,552 million in 2013 to $25,314 million.