Income statement Flashcards
Income statement
The income statement is a financial report that depicts the operating performances of a company (i.e. revenues less expenses generated – i.e. profitability) over a specific period of time (typically a quarter or year). It facilitates the analysis of a company’s growth prospects, cost structure and profitability. It is used to identify the components and sources (drivers) of net earnings
Net revenues
Total dollar payment for goods and services that are credited to an income statement over a particular time period. Revenues are referred to colloquially as a companies top-line.
Cost of goods sold
Cost of Goods sold represents a company’s direct cost of manufacture (for manufacturers) or procurement (for merchandisers) of a good or service that the company sells to generate revenue.
Gross Profits
Revenues – Cost of Goods Sold
Selling, general and administrative (SG&A)
Operating costs not directly associated with the production or procurement of the product or service that the company sells to generate revenue. Payroll, wages, commissions, meal and travel expenses, stationary, advertising, and marketing expenses fall under this line item.
Research and development (R&D)
A company’s activities that are directed at developing new products or procedures.
EBITDA
Earnings before interest, taxes, depreciation & amortization : Gross Profit – SG&A – R&D. EBITDA is a popular measure of a company’s financial performance. The rational for using EBITDA is twofold:
• D&A is a huge noncash expense for fixed asset and intangible asset intensive businesses, and stripping out the biggest noncash expense provides a more accurate picture of “real” profits during the year.
• Since companies can use different useful life assumptions and even depreciation methods to calculate D&A this can significantly skew the comparison of operating profitability across two otherwise identical firms
Depreciation
The allocation of cost over a fixed asset’s useful life in order to match the timing of the cost of the asset with when it is expected to generate revenue benefits. Depreciation is included within COGS or SG&A depending on whether the asset being depreciated is directly tied with manufacture or procurement or tied to something not directly tied like selling or marketing. The useful life of a fixed asset is generally:
• Plants and buildings (15-40 years)
• Machinery and equipment (3-20 years)
• Furniture and fixtures (5-10 years)
• Computer software and hardware (3-5 years)
• Note: Land is a fixed asset but is not depreciated
Amortization
The allocation of cost of an intangible asset over a number of years that these assets are expected to help generate revenue for the company. Amortization is a non-cash expense like depreciation. Expenses associated with internally developing intangible assets like patents, customer lists, trademarks are expensed fully as they are incurred (no amortization). Since companies are not allowed to write up the value of intangible assets (historical cost and conservatism), companies with very valuable trademarks and patents (Coke, GE, Apple) do not recognise or amortize these assets.
Other operating expenses / income
Any operating expenses not allocated to COGS, SG&A, R&D, D&A
Operating profit (EBIT)
Earnings before interest & taxes: EBITDA – D&A.
Since operating items like interest expense, interest income, and taxes can vary widely across even similar types of businesses, analysts focus on operating income or EBIT
Interest expense
Interest expense is the amount the company has to pay on debt owed. This could be to bondholders or to banks. Interest expense subtracted from EBIT equals earnings before taxes (EBT).
Interest income
A company’s income from its cash holdings and investments (stocks, bonds, and savings accounts).
Unusual or infrequent income / expenses
Gain (loss) on sale of assets, disposal of a business segment, impairment charge, write-offs, restructuring costs.
Income tax expense
The tax liability a company reports on the income statement.
