Income statements also show Earnings Per Share (EPS). EPS shows how much money shareholders would receive if all of the net earnings for the period were distributed. (A highly unlikely occurrence; they’re usually reinvested.)
Income statements are set up stepwise. Starting at the top we see the total amount of sales made during the accounting period. As you go down, you subtract costs and additional operating expenses related to producing the revenue. After subtracting all expenses, you learn how much your company netted or lost during the accounting period. This is our “bottom line.”
At the top of the income statement, often referred to as gross revenues or sales, is the total amount of money generated from sales of products or services. Because expenses are not deducted yet, the number is “gross” or unrefined.
Next come Returns and Allowances, money your company doesn’t expect to collect. This usually includes sales discounts or merchandise returns. After subtracting returns and allowances from gross revenues, you’re left with Net Revenues or Sales.
Customarily after net revenues comes Cost of Goods Sold. This is what the company spent to produce the goods or services sold throughout the accounting period. We subtract Cost of Goods Sold from the Net Revenues to calculate a subtotal called “Gross Profit” or “Gross Margin.”
Next we deduct Operating Expenses, costs that go toward sustaining a company’s operations for the period. Included are: administrative salaries, R&D costs for new products, and marketing expenses. We classify Operating Expenses differently from Cost of Sales, because we cannot link Operating Expenses directly to product or service creation.
Depreciation, taking into account the wear a...
... middle of paper ...
...CL from items ending balances.
• Reflects cash used and generated by changes in long-term assets on balance sheet.
• Two ways company can provide itself with financing:
• Borrow: reflected in Long-Term Liabilities section
• Raise money from investors: reflected in changes in Owners’ Equity accounts
• Other factor in owners’ equity is Retained Earnings (RE).
Escalating accruals can point to earnings manipulation and fraud. It is easier for managers to fake reported earnings than actual cash in the bank.
Incredibly business fraud averages $400 billion per year. To those of you who thought this was easy, exhibit One is Enron, which booked profits from multiyear gas and electricity contracts the day they were signed instead of as they paid off. Other notorious instances were Quest Communications, Tyco, and ImClone among others.
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