| Net Sales ... |
... is the total of all sales during the period
minus all returned goods and all allowances made
because of damaged or defective goods.
This item is especially important for e-commerce
firms, whose valuations sometimes depend on revenues
alone!
This item is especially important for e-commerce
firms, whose valuations sometimes depend on revenues
alone!
... is the total cost of purchased goods minus
ending inventory. Calculating the cost of goods
sold begins where calculating the cost of ending
inventory for balance sheet purposes ends. |
| Cost of Goods Sold ... |
In our example on inventory valuation, the total
cost of the purchases were $740. Under FIFO the
cost of ending inventory was $250 and under LIFO
$200. Under these methods, the cost of goods sold
for this item would be $490 ($740 minus $250) and
$540 ($740 minus $200).
The amount of income may vary, sometimes a lot,
depending on the method of inventory valuation.
... is something that also shows up in the balance
sheet. There, the total amount of depreciation
over the past life of fixed assets is shown as
a set-off from the total cost of these assets.
On the income statement, only depreciation for
the period covered by the statement is shown.
In our case, this is one year's depreciation.
|
| Depreciation. |
By using an accelerated depreciation method, such
as the double declining balance method, the depreciation
over the first few years of an asset's life will
be much greater than it would be if the straight
line method were used. This, of course, will result
in lower income - and lower taxes - during these
years. A company's decisions with respect to the
estimated useful life of assets also affects the
amount of depreciation, and therefore income, shown
on its income statement. For example, within the
limits of GAAP, a company might estimate the useful
life of a particular piece of machinery as five
years, or ten years, or any number of years in between,
thus causing a possible variation in depreciation
of as much as 100 percent. |
| Selling and Administrative Expenses ... |
... are exactly what one would expect. This item
generally encompasses all the expenses of a company
not included under another heading (called "line
items" on financial statements) on the income
statement. |
| Interest on Long-term Notes ... |
... is generally shown as a line item separate
from other expenses. In our example, the long-term
debt is in the form of notes. In the case of other
corporations, it could be represented by other debt
instruments, such as bonds or debentures. |
| Income Taxes ... |
...are shown as a separate line item, allowing
the reader of the income statement to see at a glance
what the company's income was both before and after
taxes. |
| Extraordinary items ... |
... are non-recurring expenses that are not anticipate
to happen again. The are subtracted last, so the
reader gets a picture of normal operating results.
|
| Net Income Per Share ... |
... is simply net income divided by the number
of shares outstanding. |
3.3.1 Income Statement Items