Income Statement Analysis
Agenda
What is it?
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
Accrual Accounting
Line Items
Fundamental Analysis and the Income Statement
Game Time
What is an Income Statement
The income statement summarizes the inflows and outflows of money
(not necessarily cash) over an accounting period
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
• Inflows = Revenues
• Outflows = Expenses
Inflow
Outflow
Outflows
Accrual Accounting
Why do companies use accrual accounting?
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
• Measures the performance of a company by recognizing
economic events regardless of when transactions occur
• As opposed to cash accounting where expenses and revenues
are recorded when cash is transferred
• Accrual accounting uses the Matching Principle
• States that all expenses must be matched in the same
accounting period as the revenues they help to earn
Accrual Accounting
Example
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Month 1: You cater an event where the cost to you was $100. The
customer pays you $200 for your services.
Month 2: You cater an event where the cost to you is $100. The
customer agrees to pay you $200 next month
Revenue
Expense
Profit
Cash
Accounts Receivable
Revenue
Expense
Profit
Cash
Accounts Receivable
Cash Accounting
$200
$100
$100
$100
Month 1
Accrual Accounting
$200
$100
$100
$100
Month 2
Cash Accounting
Accrual Accounting
$0
$200
$100
$100
-$100
$100
-$100
-$100
$200
Month 2
Income Statement
Line Items
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
• Start with the revenues and filter down through each expense to the
bottom line (net income/earnings)
• Revenue
• - Cost of Goods Sold (COGS)
• - Operating Expenses
• Research and Development
• Selling, General, & Administrative (SG&A)
• Depreciation & Amortization
• - Other
• Non-Recurring
• Interest
• - Taxes
• = Net Income
Line Items
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
Depreciation and Amortization
• Depreciation refers to the allocation of the cost of a tangible asset over its
useful life
• Affects how you record purchasing Property, Plants, and Equipment
(PP&E)
• E.g. A company buys a $1,000 machine with a useful life of 10 years
• The $1,000 dollars is allocated either evenly over the 10 years
(straight line depreciation) or with varied deductions (Modified
Accelerated Cost Recovery system [MACRS])
• Amortization is the same principle as depreciation but for intangible
assets
• E.g. a healthcare company spends $1,000 for a patent with a useful
life of 5 years
Fundamental Analysis and the Income Statement
Profitability Ratios
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
1. Gross Margin = Gross Profit ÷ Net Sales Revenue
• how much profit realized per unit sold
• 40250/115000=35%
2. Profit Margin Ratio = Net Income ÷ Net Sales Revenue
• percent of sales revenue that becomes net income
• 13725/115000=11.9%
Fundamental Analysis and the Income Statement
B U C K E Y E C A P I TA L I N V E S T O R S – I n f o r m a t i o n S e s s i o n
Profitability Ratios
•
Price / Earnings Ratio (PE Ratio)
• Net Income of $16.36 Billion
• 58.87/(16.36/3.21)=11.55
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GAME TIME
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GILEAD SCIENCES
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GAME TIME
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GENERAL MOTORS
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GAME TIME
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TESLA MOTORS
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GAME TIME
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J.C. Penney