the Income Statement
Back to Basics, Part 10
Like Jason behind the hockey mask, the basics are back with a vengeance!
This time, the Income Statement is the prey. The income statement brings
public the results of a company's business operations for a particular
quarter or year. Through the income statement, you can witness the
inflow of new assets into a business and measure the consumption of
assets that result from the production of revenue.
As with most elements of financial statements, the key to quality assessment
of an income statement is looking for trends over time. Compare the most recent
statement with those of like periods in prior years to gauge the direction and
progress of a company's business operations.
Revenues and expenses are recorded on an income statement at the time they are
earned or incurred, regardless of when actual assets change hands. This is in
accordance with the Accrual Accounting methods as discussed in Back to Basics,
We'll list each element of an income statement with a brief discussion below
and then look much more closely at each category in the coming weeks. If you
wish to follow along with an actual income statement as we go, click here for
a recent SEC filing from Intel (Nasdaq: INTC). Note that each
category will not appear on every income statement.
Sales or Operating Revenues: Net sales or service revenues.
Cost of Goods Sold: The amount the company paid in the production
of goods it sold. Costs may include labor, materials, overhead, and depreciation.
Gross Profit: Total revenue of a business less cost of goods
sold and selling and administrative expenses. Gross profit does not include
income from incidental sources.
Operating Expenses: The expenses incurred in running the
business. Operating expenses include selling and administrative expenses but
exclude interest, taxes, and cost of goods sold.
Operating Revenues: Revenues from any regular business source.
Operating Income: The difference between normal business revenue
and operating expenses. Excluded are expenses such as interest and taxes, as
well as any unusual income such as gains from selling a subsidiary.
Other Revenues: Increases in assets resulting from transactions
not directly related to operations. Interest earned on investments is an example
of Other Revenues.
Other Expenses: Decreases in assets resulting from transactions
not directly related to operations. Debt interest is an example of Other Expenses.
Income Before Taxes: Reported income before deducting income
Income Tax Expense: Provision for taxes on pretax income.
Income From Continuing Operations: After-tax income from operations
that will continue.
Discontinued Operations: After-tax gain or loss on a portion
of the business that is intended to be sold.
Extraordinary Items: After-tax gains or losses on nonrecurring
Net Income: The sum of all reported gains and losses.
Earnings Per Common Share: Net income divided by the average
number of shares outstanding.
Diluted Earnings Per Common Share: Net income divided by the
average number of shares of common stock that would be outstanding if all convertible
securities were converted into shares of common stock.
>> Income Statement Demystified >>