1. Income Statement Review

2. Income Statement Basics Income statement explains changes in retained earnings: RE YE ’02 = RE YE ‘01 + NI In ‘02 - Dividends In ’02 Net Income In ‘02 = Revenue In ‘02 - Expense In ‘02

4. Retained Earnings is a permanent account Net Income, Revenues and Expenses are temporary accounts –get folded into retained earnings at period-end –keep track of net income during the period –begin and end the period with zero balances

6. Net Income and Cash Flows Over a long enough period net income = cash from operations + cash from investing Therefore, the only issue is timing

7. Revenue recognition Have performed all (or a substantial portion) of your service Have received an asset (e.g., cash or receivable) which can be measured Amount is adjusted up front for bad debts, sales discounts and allowances, etc. Most common source of fraud

8. Expense recognition Generally involves transforming an asset (stock) to an expense (flow) Match to revenue if possible (e.g., product cost) –Merchandising--cost of acquiring inventory –Manufacturing--cost of making product (including overhead)

9. Otherwise charge to expense as consumed (e.g., SG&A and R&D) Measured on same basis as the asset being expensed.

11. Income Statement Format Sales -Cost of Goods Sold Gross Profit -Selling, General and Administrative Expense Operating Income +/-Interest Expense/Income +/-Other Income, Gains, Expenses, Losses, etc. Pre-Tax Income from Continuing Operations -Income Tax Expense Net Income from Continuing Operations

12. +/-Income/Loss from Operations of Businesses Sold (net of income tax) +/-Gain/Loss on Business Sold (net of income tax) Income from Discontinued Operations +/-Extraordinary Gains/Losses (net of income tax) +/-Cumulative Effect of Accounting Change NET INCOME

14. Earnings Per Share Basic EPS = Net Income to Common / Ave. Number of Common Shares Outstanding For Coke, $3,050M Net Income / 2,478M Common Shares = $1.23 Diluted EPS takes into account securities convertible into stock (e.g., stock options)