EXECUTIVE EDUCATION

INTRODUCING THEINCOME STATEMENTARJEN MULDER

EXPLANATION OF THE TOPIC

• This video will familiarise you with the concept of anincome statement, by showing:

1. What is the purpose of an income statement?

2. What do the elements represent?

3. Why should you, as a non-financial manager, care?

PURPOSE OF INCOME STATEMENTS

• The purpose of an income statement is to reveal theprofitability of a firm, usually over the last year.

• An income statement shows how total revenuesultimately translates into ‘net profits after taxes’, bysubtracting various costs.

• Since the period information is not necessarilyinformative, the income statement usually also showsthe data of the previous period (last year). Together,we can not only infer whether a firm has done wellover the past year, but also whether it has improvedor not.

WHY SHOULD A NON-FINANCIAL MANAGER KNOW THIS?

• Analysts can use income statement information toanalyse not only how much profits have beengenerated, but also the origins of these profits.

• To derive useful information from an incomestatement, a minimum working knowledge is required.

WHAT IS AN INCOME STATEMENT?

• It shows how profitable a company was during theperiod reported.

• Typically, the income statement starts with grossrevenues. Subsequently, all sorts of costs aresubtracted. We then end up with ‘Net incomeavailable to shareholders’.

WHAT IS AN INCOME STATEMENT?

• Consider the following typical income statement:

FnF Labs, thousands

e

Net sales 1,073,508

- COGS 662,968

EBITDA 410,540

- SGA expenditures 51,988

- Depreciation & Amortisation 25,471

Operating profit 333,081

- Special items 338

EBIT 333,419

- Net interest exp. 9,317

EBT 324,102

- Income tax exp. 80,908

EAT 243,194

SOME DETAILS OF AN INCOME STATEMENT (1)

INCOME STATEMENT EXAMPLE

• The income statement can be subdivided into:

• The ‘operating section’, which describes the revenuesand expenses from the firm’s primary activities (therevenues and expenses from delivering or producinggoods or rendering services).

• The ‘non-operating section’, which describes therevenues and expenses from the firm’s peripheralactivities (incl. its financing costs and tax expenses)as well as the results of its incidental activities.

SOME DETAILS OF AN INCOME STATEMENT (2)

INCOME STATEMENT EXAMPLEFnF Labs, thousands

e

REVENUE:

Services 765,428

Product sales 308,080

Total Revenue 1,073,508

OPERATING EXPENSES:

Costs of services 444,963

Costs of product sales 218,005

General and administrative expenses 51,988

Depreciation 24,168

Amortization 1,303

Other income 338

OPERATING INCOME: 333,419

Interest expense 9,317

Income before income tax expense 324,102

Income tax expense 80,908

Net income 243,194

Net income (loss) attributable to non-controlling interest 383

Net income attributable to FnF Labs 242,811

SOME DETAILS OF AN INCOME STATEMENT

INCOME STATEMENT EXAMPLE: OPERATING REVENUES

FnF Labs, thousands

e

REVENUE:

Services 765,428

Product sales 308,080

Total Revenue 1,073,508

OPERATING EXPENSES:

Costs of services 444,963

Costs of product sales 218,005

General and administrative expenses 51,988

Depreciation 24,168

Amortization 1,303

Other income 338

OPERATING INCOME: 333,419

Interest expense 9,317

Income before income tax expense 324,102

Income tax expense 80,908

Net income 243,194

Net income (loss) attributable to non-controlling interest 383

Net income attributable to FnF Labs 242,811

• We assume some assets can be easily convertedinto cash. We call these assets ‘Current assets’.

• Examples of current assets include cash and cashequivalents, short-term investments, accountsreceivables, stock of inventory, prepaid expenditures,etc.

• Let us now turn to the non-current assets.

SOME DETAILS OF AN INCOME STATEMENT

INCOME STATEMENT EXAMPLE: OPERATING EXPENSES

FnF Labs, thousands

e

REVENUE:

Services 765,428

Product sales 308,080

Total Revenue 1,073,508

OPERATING EXPENSES:

Costs of services 444,963

Costs of product sales 218,005

General and administrative expenses 51,988

Depreciation 24,168

Amortization 1,303

Other income 338

OPERATING INCOME: 333,419

Interest expense 9,317

Income before income tax expense 324,102

Income tax expense 80,908

Net income 243,194

Net income (loss) attributable to non-controlling interest 383

Net income attributable to FnF Labs 242,811

SOME DETAILS OF AN INCOME STATEMENT

INCOME STATEMENT EX.: NON-OPERATING INCOME

FnF Labs, thousands

e

REVENUE:

Services 765,428

Product sales 308,080

Total Revenue 1,073,508

OPERATING EXPENSES:

Costs of services 444,963

Costs of product sales 218,005

General and administrative expenses 51,988

Depreciation 24,168

Amortization 1,303

Other income 338

OPERATING INCOME: 333,419

Interest expense 9,317

Income before income tax expense 324,102

Income tax expense 80,908

Net income 243,194

Net income (loss) attributable to non-controlling interest 383

Net income attributable to FnF Labs 242,811

SOME DETAILS OF AN INCOME STATEMENT

INCOME STATEMENT EX.: NON-OPERATING EXPENSES

FnF Labs, thousands

e

REVENUE:

Services 765,428

Product sales 308,080

Total Revenue 1,073,508

OPERATING EXPENSES:

Costs of services, excl. depreciation 444,963

Costs of product sales, excl. depreciation 218,005

General and administrative expenses, excl. deprecation 51,988

Depreciation 24,168

Amortization 1,303

Other (income) expense, net (338)

OPERATING INCOME: 333,419

Interest expense 9,317

Income before income tax expense 324,102

Income tax expense 80,908

Net income 243,194

Net income (loss) attributable to non-controlling interest 383

Net income attributable to FnF Labs 242,811

SUMMARY

• In this video we have had a close look at the incomestatement.

• The purpose of this video was to familiarise you withthe income statement, as a preparation for my‘Finance for Non-Financial Managers’ course.