Financial Statement Analysis I: Chapter 3 ©NACM

General Chapter Notes A. Contents of Chapter 3 B. Relevance of Analysis of the Income Statement for Trade Creditors 1. Effects when the debtor makes a profit, big and small 2. Effects when the debtor takes a loss, small and large Slide 3-1

Notes on Particular Parts of Chapter 3 A. What Income Reporting to Expect from Publicly-Traded Firms B. Reported Profits is Not Cash Flow (Again) C. Subtotals on the Income Statement D. Drivers of Changes in Dollar Sales for Retailers Slide 3-2

Notes on Particular Parts of Chapter 3 (continued) E. An Example Income Statement with Some Useful Subtotals Dollars % of Sales Sales $100,000 Cost of Goods Sold $70, Gross Profit $30, % Selling and Admin. Exp. $10,000 Repairs, etc. $2,000 Other Operating Expenses $2, EBITDA $15, % Depreciation $7, EBIT (Operating Profit) $8, % Interest Expense $2, EBT $6, % Taxes $2, Net Earnings (Net Income) $4, % Slide 3-3

Notes on Particular Parts of Chapter 3 (continued) F. Why Expenses Appear on the Income Statement in the Order They Do G. Other Income or Expense and Special Items H. Equity Earnings I. Earnings per Share, Basic and Diluted J. Comprehensive Income K. Adjustments to Equity and the Implications of Issuing New Equity Financing and Share Repurchases Slide 3-4

Problem 3.12 Income Statement for Jackrabbit, Inc. Dollars Percent of Sales Net Sales $1,840,000 Cost of Goods Sold $1,072, Gross Profit (Gross Margin) $768, % General and Admin. Exp. $155,000 Selling Expenses $270, EBITDA $343, % Depreciation $24, EBIT (Operating Profit) $319, % Slide 3-5

Problem 3.12 (cont.) Jackrabbit, Inc. Income Statement (continued) Dollars Percent of Sales EBIT (Operating Profit) $319, % Other Income (Expense) Gain on Sale of Equipment $15,000 Interest Income $13,000 Equity Losses ($9,000) Interest Expense ($16,000) EBT $322, % Income tax expense $96, Net Earnings (Net Income) $226, % Cash Dividends $100, Change in Retained Earnings $126,000 Slide 3-6