Financial Statements

The Income Statement

Crow River Investment Club

www.bivio.com/crowriver
 Introduction to this Series

This is first of 4 short overviews

• 3 Main Financial Statements:

– Income Statement
– Balance Sheet
– Cash Flow Statement

• Finally, Annual Report Worksheets

– By Bob Adams
– By Paul Schneider
Income Statement: The Basics

1. Financial analysis is about Comparison.

That’s why these statements all come
with more than one year of data.

2. The Income Statement (or Profit & Loss

Statement) reports the income,
expenses and profits for a specific
period of time.
Income Statement: The Basics

3. Product Companies report “Net Sales”

4. Service Companies report “Net

Revenues.”

5. Net Sales & Revenues are the same

thing.

6. “Net” means after the return of defective

products.
Income Statement: The Basics

7. Everything on the Income Statement

can be expressed as a percentage and
compared to competitive companies.

8. Everything on the Income Statement

can be compared as a percentage to
Net Sales or Revenues.
Income Statement: The Basics

9. Companies are valued based on the

cash produced from “core” operations
(or Operating Income).

10.Focus your attention on the “core”

business. What business is the
company in? How much money did that
business generate or cost?
Income Statement: The Basics

11.Finally, be aware of income and

expenses that are “not” generated from
the “core” business.

12.If a company restructures, or takes one-

time gains and losses annually, they are
no longer “one time”, are they??
 The Anatomy of an
Income Statement
Net Sales or Revenues
- Cost of Goods Sold
= Gross Profit

Gross Profit divided by Sales =

Gross Margin, the percentage of
every dollar it costs to produce
sales.
Comparing Business Models
Let’s compare Mentor (MNTR) with Factset
(FDS) 2002 annual figures:

MNTR FDS
Net Sales $321,062 $205,853
Cost of Sales $130,455 $ 67,947
Gross Profit $190,607 $137,906

Gross Margin 59% 67%

Which one has a more profitable

business model?
 What’s Next?
Other Operating Expenses, such as:
• Utilities
• Labor Costs
• Advertising

Then, Other Income & Expenses, such as:

• Short-term Investments
• Royalties on Patents
• Payment on a Lawsuit
• Foreign Exchange Rate deficit
• Interest Income & Expenses
 The Anatomy of an
Income Statement
SO…

Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Income Before Income Taxes

This is an important SSG figure!

 Taxes?
Why do we look at pre-tax income?
• Companies have no control over taxes
• Taxes vary from state to state
• Taxes don’t show the true picture
• Various industries are taxed differently
• Tax credits skew year-to-year earnings

Taxes have their own line on the Income

Statement.
 The Anatomy of an
Income Statement
So…

Income Before Taxes

- Provision for Income Taxes
= Net Income
 The Anatomy of an
Income Statement
And…

• Net Income divided by Shares Outstanding =

Earnings Per Share or EPS

• Diluted Earnings Per Share:

The value of each share “after” the effects of

stock options and convertible shares and bonds
have been taken into consideration.
 Income Statement Ratios

Which Ratios are Important?

Gross Margin:

Sales – Cost of Sales div. by Sales

• How profitable is this business model?

• Is it more profitable than its peers?
• Is it getting more profitable from year-to-year?
 Income Statement Ratios

Which Ratios are Important?

Net Margin:

Net Income divided by Net Sales

• Is there any money left over for the shareholders

after all expenses and taxes are paid?
• Is Net Margin growing from year-to-year?
• How does it compare to its competitors?
 Income Statement & the SSG

Sales These are the items

- Cost of Goods Sold required on the Quarterly
Data Update Screen &
- SG&A Expense PERT Report
+Other Income
- Other Expenses
= Income Before Taxes
- Income Taxes
= Net Income (div. by Shares Outstanding)
= Earnings Per Share (EPS)
 A Quick Look at FactSet
2002 2001 Change

Commissions $ 62,196 $ 56,462 + 10%

Cash Fees $143,657 $120,226 + 19%
Total Revenue $205,853 $176,688 +16.5%

Cost of Services $ 67,947 $ 61,576 + 10%

SG&A Expenses $ 75,084 $ 64,209 + 17%
Total Op. Expenses $143,935 $125,785 + 14%

Net Income $40,848 $ 33,401 + 22%

Diluted EPS $ 1.17 $ .96 + 22%
Shares Outstanding 34,862 34762 0%
 A Quick Look at FactSet
2002 2001

Total Revenue $205,853 $176,688

- Cost of Services $ 67,947 $ 61,576
$137,906 $115,112
Div. By Revenues =
Gross Margin 67% 65%

Net Income $ 40,848 $ 33,401

Div. By Revenue = $205,853 $176,688

Net Margin 19.8% 18.9%

Are they getting better!!?

Next Month: The Balance Sheet

The End