Principles of Finance · free preview
The Income Statement
The income statement reports performance over a period in a layered cascade from sales through gross profit, operating income, pretax income, and net income, and each layer isolates a different driver of profitability.
1. Sales and the gross profit layer
Sales and the gross profit layer
2. Operating income and below
Operating income and below
3. A worked miniature
A worked miniature
4. From statement to statement
From statement to statement
5. The first layer
A firm reports sales of 2,000 and cost of goods sold of 1,200. What is gross profit and the gross margin?
6. What operating income isolates
Why do analysts focus on income from operations as a measure of the core business?
7. Reading the margin cascade
Firm A and Firm B report identical sales and net income, but A's operating margin is higher while its net margin equals B's. What explains the pattern?
8. Earnings per share
In financial reporting, what exactly does earnings per share measure for a company's shareholders?
9. Where net income goes
After the income statement reports net income, how does that figure reach the balance sheet?
10. Flow versus stock
Why is comparing a firm's annual sales directly with its year-end total assets a category error?
11. The bottom line
What two-word term names the income statement's final profit figure after all costs, interest, and taxes? Answer in lowercase.
12. The product economics layer
What two-word term names the first profit layer, sales minus cost of goods sold? Answer in lowercase.
13. The accrual cost of inventory sold
What three-word term names the direct cost of merchandise actually sold during the period, matched against sales? Answer in lowercase.
14. The per-unit profit figure
What three-letter abbreviation names net income divided by shares outstanding? Write the abbreviation.
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