Hello. This is Bob Salvin, the host of the AIChE e- learning course Economic Evaluation for Chemical Engineers
In this series of short videos
we are going to be reviewing financial statements. This video is part two of a three part series on the income statement.
Financial statements are the reports are issued on a quarterly and year-end basis by a particular
company to report on its financial performance during that time period.
There are three major reporting statements:
the balance sheet,
subject of part one of this video series,
which summarizes the company's assets and liabilities and stockholders' equity;
the income statement, or profit and loss statement as it is referred to,
which shows the company's net income and earnings per share over that time period;
and finally the cash flow statement, the subject of part three of this video series, which will look at
the change in the cash position for that particular company over that time period.
The reports that are issued must adhere to an Accounting System known as GAAP, which stands for
generally accepted accounting principles, which insures that
the numbers are consistent from period to period and among all companies, and are subject to external audit.
The income statement is a presentation of whether or not a company has made a profit
in that particular time period. It's presented on a book basis vs. a cash basis and we will discuss the differences between the two in a moment,
and the key metrics, as we noted earlier, include net income, which is the book earnings after depreciation, interest and taxes,
and the earnings per share or EPS which is the net income divided by the common shares outstanding.
Simply put, book basis differs from cash basis for the following reasons:
one, it includes some noncash charges such as depreciation and we'll talk about that in a moment,
it's also being done on an accrual basis, meaning that revenues are matched with expenses,
as opposed to a cash basis, where you might collect some revenue in advance and you
have not generated the goods and services that go with that revenue,
and finally, taxes are not based on actual taxes paid to the government
but rather on a book basis and also on a provisional basis. We make a provision for income tax.
So let's take a look at how this works for real income statement and what I've chosen to show you here
is the income statement for the Dow Chemical Company
for the year 2014. You'll also note that they include two prior years for comparison. All these numbers are going to be in millions of dollars.
And rather than of go through this income statement
in its entirety on this page, let's break it down so we can see some of the pieces. Before we go on, however, I just want to note that we're not
going to cover every item that you see on this spreadsheet. Some are specific to the Dow Chemical company itself,
Some are some other accounting principles that we won't cover here but I would refer you to
an accounting textbook if you want some further definition of some of these items.
So let's begin at the top of this statement. We will begin with net sales of course. This is your net revenue that you've collected during that
time period. And for the case of Dow that's a little over $58 billion. The first major subtraction is for Cost of Sales $47, just about 0.5 billion dollars,
The cost of sales are the direct costs
incurred in producing your goods or services. They will include things as raw materials, supplies, labor and other operating costs,
including this noncash charge that we noted before for depreciation.
Depreciation is used to recognize that ourfixed assets actually get used up over time
and the time period that these assets are used up over, of course, are based on their economic life.
The next subtraction is for research and development expenses,
and then selling general and administrative expenses which are your corporate level charges, your staff charges, things that are
not directly involved at the plant level or the production level.
Some of the remaining items will include things like the amortization of
intangibles. some specific charges as I noted before,
but I would direct you to the line just near the bottom which is for the interest expense line
which would be another significant item. In this case for Dow is almost a billon dollars,
and you can see that by subtracting all the items above, or adding if there is a negative number perhaps, that you will get to what is referred to
as income before income taxes. And again these taxes will not be the actual tax but just a provision for tax.
So if we note that on the next part below that we do see that provision for income tax,
which is the $1.4 billion number that you see there
and then finally we get to a net income of $3.84 billion.
There are some other adjustments that are being made. We want to get to the net income that's actually available to common stockholders and
again we're not gonna go through those particular adjustments but you can see that the number
doesn't change that dramatically but it does drop to $3.43 billion.
The next portion of the income statement that Dow has chosen to include shows you the earnings per share.
Those are the numbers that you'll hear reported by the company when they announce theirfinancial results,
and again we won't get into the differences between basic and diluted shares.
And then for information's sake Dow has included at the bottom what their dividends are and, of course, what
the weighted average number of shares actually lare over that particular time period.
And that in a nutshell is the income statement.
And as we noted before, it's one of the key financial statements that a company will produce
and if you want to learn more about the other two, the balance sheet and the cash flow statement.
please visit either part one or part three of this video series.
Again this is Bob Salvin and I look lorward to being your host in those other two videos.