Income Statement

What is the Income Statement?

The income statement is one of the financial reports of the company providing a summary of all the revenues and the expenses over the time period in order to ascertain the profit or loss of the company and measuring its business activity over the time period depending upon requirements of users .

We note that Box, Inc has been making losses for the past three years. What does this tell us about the company, it’s business model, its revenue generation capacity, its control on costs?

Box Income Statement

The basic purpose of looking at the income statement of the company is to ensure that you get the whole picture of a company’s income and expenses during the year.

Colgate Income Statement

Here is a snapshot of what an income statement format is all about –

Structure of Income Statement

As a financial analyst, we should look at the Income Statement structure very carefully. The primary objective of analyzing the Income Statement is to understand how the business is generating recurring revenuesRecurring RevenuesRecurring Revenue is a part of the Company’s total revenue or income constantly generated in the future at regular intervals (monthly or yearly). This type of revenue is relatively stable as you can predict its occurrence with reasonable confidence. read more in contrast to its expense and whether the business is profitable or not.

Below is the Income Statement structure.  We study each line item one by one.

Income-Statement-Format

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For eg:
Source: Income Statement (wallstreetmojo.com)

Sales / Revenues

At the top of the income statement structure, an accountant has to write the “total money brought into” the company by sales. It includes the total sales revenue. The total sales can be generated via the selling of products or services. It is called “gross revenue.” “Gross” means “not refined.” In this case, “gross” means expenses are yet to get deducted from “revenue.”

The next line would be “the unexpected item,” which the company never expected while making the sales. It can be “sales return” or any “sales discount.”

In the next line, “sales returns” or “sales discount” would be deducted, which will provide us with “net revenue.” That means this is the actual revenue the company has earned after taking “sales return” or “sales discount” into account.

Please note the following:

Let’s take an Income Statement example of Alphabet (Google) to see how revenue is recognized. Google primarily has three sources of revenue.

  1. Google Properties – Google properties revenues consist primarily of advertising revenue that is generated on Google search properties. This includes revenue from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, Gmail, Maps, and Google Play, YouTube, etc.
  2. Google Network Members’ properties – Google Network Members’ properties revenues consist primarily of advertising revenues generated from ads placed on Google Network Member properties through AdSense, AdMob, and DoubleClick AdExchange.
  3. Google Other Revenues – Google’s other revenues consist primarily of revenues and sales from Apps, in-app purchases, and digital content in the Google Play Store, Hardware, Licensing-related revenue; and Service fees received for our Google Cloud offerings.

Also, note that the United States contributes the most to the revenues.

Google Income Statement - Geographic Segment

source: Alphabet (Google) SEC Filings

Cost of Goods Sold

The cost of goods sold is the amount paid for merchandise sold or the cost to manufacture products that were sold during the accounting period.

In the case Income Statement example of Google, the Cost of revenuesCost Of RevenuesThe cost of revenue is the total expense incurred from manufacturing to delivering a product or service to the customer. It reflects all direct costs associated with the product or service delivered and is reflected in a company's income statements.read more consists of traffic acquisition costs (TAC), which are paid to Google Network Members primarily for ads displayed on their properties and amounts paid to our distribution partners who make available search access points and services.

Google - Income Statement - COGS

source: Alphabet (Google) SEC Filings

Gross  Profit

Gross ProfitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments.

Gross profit = Net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more – Cost of goods sold.

Management is interested in both the:

  • The amount of gross margin; and
  • The percentage of gross margin (gross margin/net sales).

Both are useful in planning business operations.

Gross Profit figure is not provided by Google. However, it is very easy to find.

Gross Profit = Revenues – Cost of Revenues

Google - Gross Profit

source: Alphabet (Google) SEC Filings

  • Gross Proift (2016) = 90,272 – 35,138 = 55,134 million
  • Gross Profit (2015) = 74,989 – 28,164 = 46,825 million

Selling General and Admin Expenses

SG&A are the expenses other than cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more that are incurred in running a business.

In Income Statement example of Google, SG&A expenses are divided into two parts a) Sales and Marketing b) General and Administrative

Google Income Statement - SG&A

source: Alphabet (Google) SEC Filings

  • SG&A Expense (2016) = 10485 + 6985 = 17,470 million
  • SG&A Expense (2015) = 9047 + 6136 = 15,183 million

Operating Income or EBIT

Operating Income or “earnings before interest and tax” (EBIT) is the difference between gross margin and operating expenses. It represents the income from a company’s normal or main business. It is used to compare the profitability of companies or divisions within a company.

Cleaning of the Numbers – Removing non-recurring numbers.

Please note that this Income Statement example of Google includes Research and development cost as an Operating Expense.

Google - Income Statement - EBIT

source: Alphabet (Google) SEC Filings

  • EBIT or Earnings Before Interest and Taxes of Google was $23,716 million in 2016 and $19,360 million in 2015.

EBITDA or Earnings Before Interest Taxes Depreciation and Amortization

Google’s Income Statement structure does not provide Depreciation and Amortization as a separate line item. In order to find EBITDA, we need to find Depreciation & Amortization figures.

Cash FlowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more provide us with these details, as seen below.

Google - income Statement - D&A

source: Alphabet (Google) SEC Filings

  • EBITDA (2016) = EBIT (2016) + Depreciation (2016) + Amortization (2016)
  • EBITDA (2016) = $23,716 + 5,267 = 28,983 million
  • EBITDA (2015) = EBIT (2015) + Depreciation (2015) + Amortization (2015)
  • EBITDA (2015) = $19,360 + 877 = 20,237 million

Also, see the difference between EBIT vs. EBITDAEBIT Vs. EBITDAEBIT signifies the operating profit the company makes before the inclusion of interest and tax expenses. In comparison, EBITDA determines the company's overall operational profitability by summing the depreciation and amortization expenses to the operating profit.read more.

Interest Income & Interest Expense

Below is the snapshot of the Income Statement example – Googles Interest Income and Interest Expense.

Google - Income Statement - Interest Income expense

source: Alphabet (Google) SEC Filings

  • Google Interest Income was 1,220 million in 2016, whereas its Interest Expense was 124 million.

Income Before Tax

Thus, it can be calculated by subtracting the interest from EBIT.EBIT.Earnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more

EBT = EBIT – Interest

Please see the below calculation from Google’s Income Statement example

Google - Income before tax

source: Alphabet (Google) SEC Filings

  • We note that Google’s Income Before Tax was 24,150 million in 2016 and $19,651 million in 2015.

Net Income

Net income (PAT) is what remains of the gross margin after operating expenses are deducted, other revenues and expenses are added or deducted, and income taxes are deducted. It is the final figure, or “bottom line,” of the income statement.

Net income is an important performance measure:

Please see the below Net Income calculation from Google’s Income Statement example

Google - Net Income

source: Alphabet (Google) SEC Filings

  • Google’s Net Income was 19,478 million in 2016 and 15,826 million in 2015.

Earnings Per Share

EPS can be calculated by dividing the “net profit” or “net income” with “outstanding shares.” For example, if we need to calculate the EPS of Company ABC and we know that the “net profit” is $100,000 and the number of “outstanding shares” is 10,000, the EPS would be = ($100,000/10,000) = $10 per share.

Please see the EPS Calculation from Google’s Income Statement example

Google - EPS

source: Alphabet (Google) SEC Filings

  • We note that Google increased its Earnings Per share from $23.11 per share in 2015 to $28.32 per share in 2016.

Nestle Example

Let’s have a look at Income Statement example of Nestle’s where along with normal income statement structure, we will take “income from associates & joint ventures,” etc. into account.

The consolidated income statement of Nestle for the year ended 31st December 2014 & 2015

Nestle

source: Nestle.com 

Few things in Nestle’s income statement structure that are different than the example we did before –

  • Gross profit is not dealt with separately.
  • Second, there are two types of operating expenses and income. First, trading operating expenses and incomes are taken into account, and then, general operating expenses and incomes have been considered.
  • Instead of labeling “interests income,” and “interest expenses,” “financial incomes,” and “financial expenses” have been mentioned which are similar.
  • After deducting the taxes, “income from associates & joint ventures” has also been considered.

In the final analysis

The income statement is one of the most important financial statements investors should look at before they ever make a decision to invest in a company. If you want to invest in a company, you can use vertical and horizontal analysisHorizontal AnalysisHorizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.read more of the income statement to make an informed decision.

Income Statement Video

 

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