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Learning to Invest / Reading Financial Statements


Subject:  Income Statment (FAQ v. 0.2) Date:  5/24/2000  1:24 AM
Author:  jmls Number:  1095 of 3988

Dear y'all,

This is the "Income Statement" part of the latest version of the "Reading
Financial Statements" FAQ.  As always any suggestions are appreciated.
Hope y'all find it useful.


Lleweilun Smith

Q.  What is the format of the income statement?

A.  The income statement may also have the names "Consolidated Statement
of Income", "Consolidated Statement of Operations" or something similar.
In general there is three years of information on the annuals.

The format varies between different types of companies, what follows is a
generic form for a retailer or a generic industrial.

Sales                                        For many types of companies
                                             the cost of goods sold is the
Cost of goods sold (COGS)                    highest single expense.  Gross
                                             earnings / sales = gross profit
Gross earnings                              margin.  The Rule Makers use
                                             gross profit margin as a
                                             screening criterion.

Selling, general and administrative (SG&A)   Here is lumped other sorts
                                             of costs that go into running
Advertising, research and development        a business.  SG&A is crucial for
                                             the business to run, others like
Goodwill amortization                        advertising and R&D are
                                             "optional" but important (one
Depreciation                                 could cut R&D but eventually
                                             there won't be any new products!)

                                             Goodwill amortization is often
Operating earnings                         lumped together with
                                             depreciation.  These non-cash
                                             charges may or may not represent
                                             "real" cash outlays.

                                             Operating earnings/Sales =
                                             "operating margin".

Other earnings                               Down here other sources of
                                             earnings may be included.  For
Extraordinary items                          example, interest income or
                                             gains from sale of divisions
Income tax provision                         may be added here.  Also here
                                             is where taxes are accounted
Net earnings                                for.

Earnings per share  - basic                  Diluted EPS is calculated from
                    - diluted                assuming all outstanding
                                             "in the money" options and
                                             warrants are exercised.     

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