Intro to Income Statement PPT for PDF - The Kaplan Group

Introduction To The Income Statement

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The Kaplan Group | Introduction to The Income Statement

Hi. This is Dean Kaplan. The Kaplan Group is a commercial collection agency specializing in debt collection of large business to business claims.

CREDIT MANAGER SEMINARS

This video series introducing you to financial statement analysis is based on the dozens of training seminars I have given to credit industry groups organized by Dun & Bradstreet, the National Association of Credit Management and Riemer Reporting

Services. It is applicable to anyone wanting to learn about this topic, although on occasion I will highlight information from the perspective of credit management.

Cash Flow Statement For the Year Ended December 31, 2011 (000s)

Cash Flows From Operating Activities

Net Income

397

Depreciation and amortization

318

Unrealized gain on marketable securities

Balan(1c2e) Sheet

Decrease (increase) in deferred taxes

(44) As of December 31, 2011 (000s)

Net increase (decrease) in receivables, inventories, prepaids, payables (97)

Total Cash Flows From OperatinAg sAscettivsities

562 Liabilities

Cash Flows From Investing ActivitieCsash Purchase of machinery, equipment, ManadrkimetparbovleemSeenctusrities

481 Accounts Payable 1,34(6230) Current Portion L-T Debt

Decrease (increase) in employee advAacnccoesunts Receivable

1,677(60) Taxes Payable

Proceeds from the sale of marketaIbnlIencvseeoncutmorirtyiees Statement 2,936 22 Accrued Expenses

Purchase of marketableFsoerctuhreitieYseaPr rEenpdaieddEDxpeecnesmesber 31, 2011 (107020(9s6)) Total Current Liabilities

Decrease (increase) in notes receivable

(46)

Decrease (incrSeaaslee)sin deposits Other Current Assets

58(17)11,892

Total Cash FlCowosstForof mGoInovdesstSinogldTAoctatilvCituierrsent Assets

6,670427 L9on,9g0-t5erm Debt

Cash Flows FroGmroFsinsaPnrcoinfigt Activities Gross Value of Property,

New short-term borrowings Plant & Equipment

Repayment ofRsehsoerta-trecrhm&boDrreovweinlogps ment Accumulated

Repayment ofSloenllgin-gterEmxpboernrosweingsDepreciation

Total Cash FGloewnseFrarol m& AFidnmaninciisntgNraeAtcivPteirvoiEtpixeepsrteyn, Pselant,

Equipment Net Increase inTCoatashl OapnderCaatisnhg EEqxupiveanlseents

To1t,9a8l L7iabilities 0 2,019 Stockholders Equity (1,021) 225

Common Stock and (664) 0 Paid5-2in0Cap 1,(315,0521) Ret4ai9n0ed Earnings

(886) To1t,a2l3S5hareholders' Equity

Cash and Cash EOqpuievaraletnintsg, BPergoifintningNote Receivable

341,9367 752

Cash and Cash Equivalents, Ending Interest Income Total Assets Interest Expense

481 Total Liabilities and 8,374 Equ1i1ty4

10

Other Income

25

Pretax Income

881

625 1,021

36 157 1,839

2,332 4,171

194 4,009 4,203

8,374

Income taxes

352

Income before Extraordinary Items

529

Extraordinary Items Net Income

(132) =3=9=7=

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3 FINANCIAL STATEMENTS

In this introduction series , we are providing a simple, basic overview of financial statements and how to analyze them. In this first video, we explain what the income statement is and the information that is presented on it. In the next video, we explain how to analyze the income statement, and in subsequent videos we cover the balance sheet and cash flow statement. The information presented in these videos is also available in a free download, which includes definitions of most terms mentioned in these presentations.

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The Kaplan Group | Introduction to The Income Statement

STATEMENT OF PROFITABILITY

The income statement is the statement of the company's profitability during a specific period of time. That period of time may be a month, a quarter, or a year. Profitability is not the same as cash flow which may be more important for credit managers assessing the credit risk of a potential customer. While profitability is important, it is not the only factor to consider when evaluating credit risk. Accounting rules determine how items should be recorded in the financial statements but we will not be getting into the rules in this introductory series.

INCOME STATEMENT

At the top of the income statement, the first thing you will notice is that it tells you what period the information is for, typically a month, a quarter, or a year. The other key thing at the top of the income statement is to tell you whether the amounts shown are actual dollars, down to the penny, or whether these are truncated numbers. For example, when it says 000's that means we've left off three zeros. Another way to show that is to have the word `thousands' or even `millions'. So a number that says 11892 and there's nothing here, then that means $11,892. But in this example, the three zeros indicate that the numbers shown are in thousands. Therefore the 11892 stands for $11 million 892 thousand dollars. If it said millions then it would stand for $11 billion, 892 million dollars--and yes, there are some companies with numbers that big.

Income Statement

For the Year Ended December 31, 2011 (000s)

Sales Cost of Goods Sold Gross Profit

11,892 9,905 1,987

Research & Development Selling Expense General & Administrative Expense Total Operating Expense

225 520 490 1,235

Operating Profit

752

Interest Income

114

Interest Expense

10

Other Income

25

Pretax Income

881

Income taxes

352

Income before Extraordinary Items

529

Extraordinary Items Net Income

(132) =3=9=7=

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The Kaplan Group | Introduction to The Income Statement

Income Statement

SALES AND GFoRr OthSeSYePaRr EOnFdIeTd December 31, 2011 (000s)

Sales

11,892

Cost of Goods Sold Gross Profit

9,905 1,987

TchoemefirsstcioRtesemt soetfoagbroceohdres&psoDorletdev.deTlohonisptmihseethninetcdoimreectsctaotsetmoef nmt aiskitnygpitchaellyprroedveuncutsetho2ar2ts5waleerse.

Next sold

to

generateStheellirnegveEnxupeernespeorted on the income statement. For example, if th5is2c0ompany is

a manufacturer of coffee cups, the cost of goods sold represents the amount of money to

make all Gofethneercaulp&s Athdamt wineirsIentrtahcetionvesmoEldxeptoeSngtseaenetreatme theen$t11,892,000 in rev4e9n0ue. This

wasoualldl oinf ctThlouedtpaeal tcOhkepaFergaorinwargttmihnmeagatYetEerexiraaipalrsle,EanbnnsuddetenthdoetDiltaeebmcoesrmtlihkbaeet arwd3av1se,rret2isq0iun1igr1eed(0xtp0oe0mnssa)ekse.1tW,h2eh3ec5nupyosuas well

subtract tShealceosst of goods sold from sales, that gives you what is calle1d1t,h8e9g2ross profit. This is a vOepryerimatpinogrtaPnrtonfiutmber because this is the profitability before all o7f 5th2e

overheadC, aonsdt tohfeGhoigohdesr tSheolgdross profit, the more profitable the busine9s,s90ca5n be.

OPERAIGnTtreIoNrsesGstPIErnoXcfiotPmEeNSES

Interest Expense Research & Development Other Income Selling Expense Pretax Income General & Administrative Expense

1,918174

10 225

25 520 881 490

ITnoctoaml Oeptearxaetsing Expense

1,233552

Income before Extraordinary Items

529

Operating Profit

752

TehxpeennesxetsEsIntexhtcteartartioeotnhsretdoIficnntochamoerypminaItecneoymminsecsutraretedminenotrdisetrhteo

operating generate

reexvpeennusee,sa.sTwhees(l1l1ea13as42rce) otshtes

related toInintveerestsint gEfxoprefuntsuere sales. Accounting rules require that operating1e0xpenses

be divideNdeutpIninctoomtheree categories: research and development, general aOndthaedrmInincisotmraetive overhead. Costs incurred to develop

tsheellicnugrreex=np3=t2e9p=5n7r=soed,uacntsd

as well asPnreewtaxanIndcpoomteential future products are recorded in the research8a8n1d

development category, which often is referred to as R&D. Selling expenses include

marketing and advertising costs plus sales people and customer service expenses.

General aIndcoamdmeintaisxterastive expenses include expenses for departments s3u5c2h as

human resources, legal, and finance. For this company, total operating expenses were

$1,235,00In0.cWome ethebnefsourbetrEaxcttrtahoerdopinearraytinItgemexspenses from the gross profi5t,2a9nd that

gives us the operating profit. This is one of the most important items in measuring the

company's profitability.

Extraordinary Items

(132)

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Gross Profit

1,987

Research & Development

225

Selling Expense

520

GenTehrael & KAadpmlainnis t GrartioveupEx p| eInntsreoduction to The Income4S9t0atement

Total Operating Expense

1,235

NON-OPOEpRerAatTinIgNPGroEfitXPENSES

752

Interest Income Income Statement

114

Interest EFxopr ethneseYear Ended December 31, 2011 (000s)

10

OStahleersIncome Pretax Income Cost of Goods Sold

11,89225 881

9,905

Non-operaIntGincrgoomsinsceoPtmraoxefietasnd expenses are items that effect overall profit1a,b9i3l8it57y2but aren't

related to the operations of the business. The easiest example is interest income. When

the compaInRyceohsmaesaerecbxhterfa&omrDeoeEnvexeytlorapovmardielainnbtaleryitItkeemepss it in the bank and it earn2s522i5n9terest. The

amount of interest a company earns has nothing to do with its sales, cost of goods sold,

or operationSse.llTinhgerEexfopree,nisteis a non-operating item. The same can be sai5d2f0or interest expense oEnGxatenrnayeomrradolinn&eaAyrydthImtaetinmthissetrcaotivmepEanxpy ehnasseborrowed. While this is an(4e19x3p02e)nse, and it

negatively impacts profitability, it doesn't have anything to do with operations of the

bfoursainlleostsh.eNIrtTnehootatansIn-l otcOopopdemeroareawtitniitnghgihnEocwxopmtehene,swbeuhsilienetesms pwoarsarfiynacnhcaendg.eOs tinhethr einvcaolmu1ee,=2o3i3=sf95=aa7=scsaettcshi-sall

also reflecteOdpienrathtiinsgsePcrtoiofint. The non-operating income is added to the o7p5e2rating profit

number to arrive at pretax income. If non-operating income is actually a loss, this will

show as a negative number on the income statement, and when that negative number is

added to thIentoepreesrat tIinncgopmroefit, it results a smaller amount shown as pretax1i1n4come.

Interest Expense

10

NET INCOOthMerEIncome

25

Pretax Income

881

Income taxes

352

Income before Extraordinary Items

529

Extraordinary Items Net Income

(132) =3=9=7=

In the final section of the income statement, we adjust pretax income for other items

such as income taxes and extraordinary items. Accounting rules are very specific on

what items should be recorded as extraordinary items instead of in operating or non-

operating categories. Net Income is calculated by subtracting income taxes from pretax

income and adding or subtracting extraordinary items. So in this example, this

company made $397,000 during the prior year on sales of $11.9 million.

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The Kaplan Group | Introduction to The Income Statement

The next video in this series is Beginning Income Statement Analysis. Remember, you can download a transcript of this video along with screenshots and definitions to have as a permanent resource. If you found this information valuable, please Share it or Like it. If you need debt collection assistance, we are specialists in large business to business claims and we can refer you to other agencies if your needs do not fit with our expertise. Just fill out the Request A Quote form or give us a call.

More free videos and downloads on Financial Statement Analysis are available at financial-statement-analysis

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Beginning Income Statement Analysis

The Kaplan Group

Commercial Collection Agency Superior Results Since 1991!

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! 805-541-2639

? The Kaplan Group!

The Kaplan Group | Beginning Income Statement Analysis

In the prior video, we provided an overview of the income statement. In this video we explain how to do some simple analysis of the information on an income statement.

INCOME STATEMENT

We are using the same income statement from the last video, but we have now added some line numbers to the left of each row. These numbers are there to help you understand which items we are using in our calculations, and how to do the calculations that end up giving us insights into the income statement.

Line#

Income Statement For the Year Ended December 31, 2011 (000s)

1 Sales 2 Cost of Goods Sold 3 Gross Profit

4 Research & Development 5 Selling Expense 6 General & Administrative 7 Total Operating Expense 8 Operating Profit

9 Interest Income 10 Interest Expense 11 Other Income

12 Pretax Income 13 Income taxes 14 Income before Extraordinary Items 15 Extraordinary Items 16 Net Income

11,892 9,905 1,987

225 520 490 1,235 752

114 10 25

881 352 529 (132)

397

GROSS MARGIN

Since the income statement is a measure of profitability, the first thing we want to do is analyze some of the profitability measures. The first one is gross profit, which is the profit the company made on sales after cost of goods sold. We are going to calculate the gross margin to look at profitability as a percentage. The gross margin is calculated by dividing the gross profit of $1,987,000 by revenue of $11,892,000 and we see that the gross margin percent is 16.7%. Now whether 16.7% is good or bad is something we can't tell just yet. We'll discuss how to determine if this is good or bad in a moment, but first we will define a few other profitability ratios.

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