Income Statement

Defined: The income statement measures the performance of a company for a specific period by comparing revenues and expenses through operating and non-operating actitivities over a three year period. The income statement also displays the net income/loss.

What it tells us: The income statement tells us if the company makes money, where the company spends money, and where the earnings come from. 

Revenue

     Revenue

-    Cost of Good Sold (Cost of Revenue)

=   Gross Profit

Operating Expenses (Research and Development, Selling, General and Administrative, Amortization, Other)

-    Total Operating Expenses

=   Operating Income

-    Interest and Tax

-    Non-Operating Expenses

-    Interest expense (Money paid out against retiring debt)

=   Net Income

Revenue

• • Revenue Does Not Equal Profit

Cost of Goods (Cost of Revenue)

• • Direct costs attributable to the production of goods sold by a company.

  • Includes the cost of materials and labor to produce a good.

  • Excludes indirect expenses such as distribution costs and sales force costs

Gross Profit

• • This number displays the percentage of revenue left after the production costs are reduced. 

  • Should be above 40% or better, anything below 20% signals fierce competition.

Gross Profit Margin

• • Gross Profit Margin = Gross Profit / Revenue

  • How efficiently a company converts sales into profit

  • This must be compared within the industry the company operates in. For instance, Nike and Under Armour. 

Selling, general, & administrative costs

• • SG&A is the acronym for selling, general and administrative.

  • Incurred to 1) promote, sell, and deliver a company's products and services, and 2) manage the overall company.

  • Sales commissions, advertising, promotional materials, compensation of the company's officers as well as the marketing, sales, finance and office staffs, the rent, utilities, supplies, computers, etc. that are outside of the manufacturing function.

Research & Development 

• • These are costs incurred to develop new products or processes that may or may not result in commercially viable items. 

Operating Income

• • Profit before interest, taxes, gains on assets, etc. 

Interest Expense

• • The cost of borrowed money or other credit. 

  • The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.

Tax Expense

• • How much tax is payable based on the revenue

  • This number is rarely accurate due to tax breaks 

Net Income 

• • We are looking for a 10 year upward trend

  • If a company does not show a consistent trend, look for the reason of downturn or odd years. You will want to explain these things in your paper.

  • % of net earnings relative to revenues should be 20% or higher for a DCA company. This may not always be true. 

Net Income Margin

• • Net Earnings/Revenue = % Efficiency

  • Measures how efficiently a firm converts revenue to profit

Vocabulary

• • Income Statement

Additional Reading

• • Kahn Academy Videos

  • Don't Run Out of Money: 3 Growth Company Case Studies by Jill Hamburg-Coplan on INC

Student Activity

Research the critical data for your company. Locate three years of performance and analyze the meaning of the data.