What is an Income Statement

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What is an Income Statement ?

• A financial statement A STATEMENT OF EARNINGS
  which exhibits the results of a companys
  operations (Note for a period of time Month
  /Qtr/Year )
• It summarizes Revenues generated and costs
  incurred (Expenses)
• Bottom line of an Income statement is net income
  or net loss
• REVENUE EXPENSES NET INCOME

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SUB TOTALS PROVIDE IMPORTANT INFORMATION

• NET SALES - COST OF SALES GROSS PROFIT

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Definitions
Net sales are total recorded sales minus any
discounts or returns and allowances Cost of sales
also referred to as the cost of goods sold- It is
the expenses incurred to purchase or manufacture
the merchandise sold during the period Gross
profit also referred to as Gross Margin It is
the excess of Net Sales Revenue over the cost of
Goods sold
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Gross profit-expenses operating
income Operating income - interest expense
income before tax Income before tax - income tax
net earning / income
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SPECIAL ITEMS
Depreciation The process of breaking down and
assigning the total cost of equipment or plant to
periods benefited EXAMPLE Cost of machinery
10000 Estimated useful life 5 Years Every Year
assign 2000 (10000/5) of this cost as expense
called the depreciation expense
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Amortization
Just like Depreciation it is the process of cost
allocation over the periods benefited The
difference is that the asset being depreciated is
Intangible thus its called Amortization EXAMPLE A
mortizing Goodwill
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Asset write off

• A tool to bolster future profit margins
• Some companies prematurely write off assets
• EXAMPLE
• Because Cisco is so drastically writing down the
  value of its raw materials, should it use those
  materials down the road, the costs effectively
  will be zero. Put differently, by wiping out
  assets now, Cisco will improve its profit margins
  (lower costs equal higher profits) later
• For Cisco, Today's Write-Off May Be Tomorrow's
  Free Ride by Adam Lashinsky, Silicon Valley
  Columnist

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Restructuring Charges

• Earnings that excludes certain expenses a company
  deems non-recurring, non-cash or otherwise not
  important for understanding the future value of
  the firm
• Higher levels of excluded expenses lead to lower
  future cash flows and can mislead investors
  about a firm's profitability

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Is there too much focus on ONE NUMBER?
EPS EARNINGS PER SHARE
EPS FOR TOYS R US IN 2000 WAS 1.14
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WHAT DOES THIS REALLY MEAN ? EPS EPS is the
amount of Net Income ( earnings) related to each
share of stock EPS Net income / Number of
shares outstanding
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REVENUE RECOGNITION ISSUES
DANGER! DANGER!
REMEMBER THAT REVENUE MUST BE RECOGNIZED IN THE
TIME PERIOD THAT IT IS EARNED
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• DID MICROSTRATEGY DO THE RIGHT THING ?
• HIGHLIGHTS
• In March 2000, Stock hit high of 323/ Share
• Up 46 times in 1 Year
• Revenue reported for 1999 205.3 Million

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March 20, 2000 To comply with SEC rules
MicroStrategy must restate 1999 Revenues to 150
Million
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Results of this News Flash Investor Reaction

• Stock plunged to 63
• Subsequent decline to single digits

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• LESSONS LEARNT FROM MICROSTRATEGY DEBACLE
• How is revenue recognized?
• MicroStrategy initially recorded Revenue on Long
  term contracts immediately
• SEC says Should have spread out over several
  future years.

Lesson 1 Spread out Revenue over future years.
Record in the year recognized
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• What's the track record of the stock being
  bought?
• If the stock was bought at 333, Did you factor
  in that stock had already increased 46 times
• Stock went from 7 to 333
• Is it a rare phenomenon- Is it likely that a
  stock would be worth that much more in One Year?

Lesson 2- Look behind the increase See reasons
for such phenomenal spikes
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• What supports a Stock price?
• Assets measured by Book Value
• Book Value Assets- Liabilities
• MicroStrategy- Book value per share1.36
• Dividends
• MicroStrategy- Paid no dividends
• Earnings per share
• MicroStrategy- EPS was 17 cents
• MicroStrategy sold
• 245 times book value and 1959 times EPS
• Lesson 3 - Look for these indicators before
  buying stock

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DIVERSIFY

• In two days MicroStrategy lost 80 of its value
• A mutual fund which owned a large percentage of
  MicroStrategy lost 10 of its value
• Lesson 4- Diversify

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VENTRO

• Stock prices hit a high of 240 / Share on
  2/27/200
• Article in WSJ discussed its Revenue Recognition
  policy
• Some dot-com companies getting plump on
  revenues from web sales, soon could be put on
  crash diet

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VENTRO GROSSED UP REVENUES

• FASB wants companies to meet certain tests before
  booking such amounts
• TESTS
• Do these companies truly assume revenue and
  credit risk?
• Do they actually own title of the products for a
  certain period?

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IT ISNT JUST COMMISSIONS BEING BOOKED- A LOT MORE

• Analysts tracking Ventro expect its 29 million
  grossed up revenue to more than quadruple to 140
  million in 2000 WSJ
• Does Ventro pass the tests under consideration by
  FASB?
• Ventro takes title of products, absorbs cost and
  bears credit risk( but risk is nil since
  customers are established players)
• Ventro never takes product into inventory owns
  title of products only for duration of shipment

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RESULT

• March 2000, Ventro's share price soared to
  243.50.
• December 22, 2000, Ventro's stock hit a new
  52-week low of 0.59