Income Statement
Net Income = Revenues – Expenses
Revenues: - Expenses:
Net sales - Cost of goods sold +Operating expenses +
Non-operating expenses +
Taxes
Understanding the Income Statement
Net Income sometimes called:(net) earnings(net) profits
Net Sales sometimes called:(net) revenues
Cost of goods sold sometimes called:cost of sales
Understanding the Income Statement Accrual Accounting
(aka “A Cruel Accounting)” Recognize the revenue “as soon as the effort
required to generate the sale is substantially complete and there is reasonable certainty that payment will be received”
For credit sales…the “sale” might come significantly before the payment
Understanding the Income Statement
From Income Statement:Net Sales in 2007 = $2871.8 millions
From Balance Sheet (change in 2007-2006):A/R increased by $17.4 millions
This means actual CASH from sales was:$2871.8 - $17.4 = $2854.4 millions
$17.4 million is still to be collected.
Exercise: Wibley’s Foods
Excerpt from Balance Sheet 2007 2008 Change in Account
Accounts Receivable (less reserve for possible losses)
$190M $255M $65M
Excerpt from Income Statement 2007 2008
Net Sales(less reserve for possible losses)
$3000M $4050M
Question 1: How much did Wibley’s receive IN CASH from sales in 2008?Question 2: How much is still “missing in credit?”
Understanding the Income Statement Depreciation
Build a new facility for $50million in 2009 If entire cost is assigned to 2009 (as an
expense), what does that do to financial results for 2009?
Depreciation allows “evening out”: allocate past expenses to future periods
Understanding the Income Statement Need to know: asset’s useful life; salvage
value; method of allocation Straight Line—depreciate by same amount
each year Accelerated Depreciation—more
depreciation in early years, less in later (alters timing of depreciation)
Understanding the Income Statement Straight Line E.g.
$50 million asset value, useful life of 10 yrs, salvage value of $10 million:
Straight line depreciation will be $4 Million per year ([$50million-$10million]/10)
The “Depreciation” deduction in the income statement will be $4M each year, instead of $50M the first year.
Understanding the Income Statement What does depreciation method chosen
mean?Straight line might tend to overstate earningsAccelerated might tend to understate earnings
Reporting Taxes: Be Aware
For shareholders: Accurately portray performance
For government Minimize tax payable (e.g. rapid depreciation)
This means actual tax payments may differ from “provision for
taxes” on income statement
“Enough said” We aren’t going to get into this. But be aware that
how taxes are handled can create a “false” picture of performance.
“Earnings” isn’t always “Earnings”
Defining EarningsNet incomeOperating income“Creative” income
Proforma Omit anything that might cloud investor perceptions
EIATBS Ignore all the bad stuff