2. Income Statements Flashcards
List 6 Valuation Techniques
Multiples (PE, PB, EV/EBITDA, etc)
Discounted Cash Flow
Earnings Power Value
Perfect Foresight Analysis
Sum Of The Parts
Private Market Analysis
what does the income statment tell you
about the profit and losses a business generates over a particular amount of time
the SEC requires income statments
how often?
Quarterly (10Q)
Annual (10K)
the bottom line referes to what?
Net Profit (Revenue - losses)
multi step income statment reaches net profit in how many steps
4
2 other names for Earnings
Net Profit, Net Income
other name for net income
earnings, net profit
what are the 2 ways managment can impact ernings
increasing revenue, decreasing costs
COGS stands for what
Cost Of Goods Sold
What are COGS What do they include
Cost of goods sold:
they only include the costs incured in making a product
for a chocolate bar: the cocoa, sugar, butter, almonds, wrapper (ingredients)
water, electricity used to make the bar (factory)
cooks, quality contro,l taste testers, truck drivers (labour)
what is gross profit
the profit after subracting all direct expenses related providing the product or service
what are operating expenses
day to day expenses needed to operate the business that are not directly related to creating the product
CEO
Advertising
Advertising staff
rent
sales staff
(none of these actually make the product but are a expense in the busness)
what is the formula for operating profit
Operating Profit = Total Sales - COGS - Operating Costs
What are often the 2 biggest Non-Operating Expenses
- Interest Payments
- Taxes
operating profit - non-operating expenses = X
what is X
net profit, or ernings
what are the 2 overaching principals for making a income statment
- Revenue Recognition Principle
- Matching Principle
Do Profits = Cash Flow
explain
Not Necessarily
you can have ernings of 100million.
this does not mean 100 million comes in the door
the cash flow statment tells you what cash is coming in the door and what cash is leaving
over time ernings and cash flow should reconcile
but in the short term they can be quite different
Revenue Recognition Principle
explain it
Only recognize revenue in the period if the ownership of the
goods is passed onto the buyer
not necessarily when the cash changes hands
Matching Principle
explain it (2 parts)
A) Expense what you used up in this period to generate the sales
in this period
B) Recognize any expense that expires in this period and holds no future benifit
Case Study
Magazine Company:
- Customer Pays Upfront For Whole Year
- Monthly Subscription
- Only Passes The Product To The Customer Monthly
Q. Can the Payment Be Considered Revenue
Yes But only for the Quarter (3/12 for Q10)
what is wrong with this income statement?
what rule does it violate?
Case Study
what does it mean my gross profit is up from 2million to 2.2 million
and
Revenue is up from 4million to 4.8million
you are becoming less efficient at converting revenue dollars into gross profit
What Does a Declining Margin Mean?
Margin is the difference between Revenue and Gross Profit
A Declining Gross Margin Means You Are Making Less Mone Per Revenue Dollar
less efficient
what is a common sized income statment
what can it be usful for
Gross profit/ Revenue = Gross Margin
Operating profit/ Revenue = Operating Margin
Pre tax profit/ Revenue = Pre Tax Margin
Net profit/ Revenue = Net Margin
- see how the company evolves over time
- Quickly compare and benchmark 2 companies
What Company is more efficient?
Company B
which company is more efficient. calculate
company B
What is the formula for yearly growth?
What is the CAGR formula. (Important)
if 9 years diff use #years =8 (dont count first year)
Does this company have a problem?
Not nessesarily
Growth = (this period/the last period) - 1
some buissnesses can by cyclical (high sales over xmas example) so a deteriation between one period to the next does not nessessarily mean the company is in trouble
