More of this Feature • Introduction • Income Statement • Revenue / sales • Cost of Goods Sold • Gross profit • Gross margin • The first three lines • Operating Expenses • R&D Expense • SG&A Expense • Goodwill Charges • Extraordinary Events • Accounting for extraordinary events • Oper. income/margin • Interest income and expense • Interest coverage ratio • Depreciation expense • Accum. Depreciation • Straight-line Method • Accelerated and Sum of the Years' Digits Method • Dbl Declining Balance • Comparing Depr. Mths • EBITDA • Income taxes • Minority Interests - cost, equity, and consolidated methods • Unreported earnings • Continuing operations • Accounting changes • Preferred dividends • Net income applicable to common shares • Net profit margin • Basic vs. Diluted EPS • Hiding share dilution • Share repurchases • Return on Equity- ROE • Asset turnover • Return on Assets- ROA • Projecting earnings • Formulas & Calculations • Putting it together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

From Other Guides • Minority Interest on the Balance Sheet • Minority Interest Question

Elsewhere on the Web • Equity Method • Berkshire Hathaway Shareholder Letter, 1980, explaining Cost, Equity, and Consolidated Methods • Look Through Earnings

Minority Interests on the Income Statement
If Federated Department Stores [the owner of Macy's and Bloomingdales] purchased five percent of Saks Fifth Avenue, Inc., common sense tells us that Federated would be entitled to five percent of Saks' earnings. How would Federated report their share of Saks' earnings on their income statement? It depends on the percentage of the company's voting stock Federated owned.

• Cost Method (If Federated owned 20% or less):
The company would not be able to report its share of Saks' earnings, except for the dividends it received from the Saks stock. The asset value of the investment would be reported at the lower of cost or market value on the balance sheet. What does that mean?

If Federated purchased 10 million shares of Saks stock at $5 per share [for a total cost of $50 million], it would record any dividends received on its income statement, and add $50 million to the balance sheet under investments. If Saks rose to $10 per share, the 10 million shares would be worth $100 million [$10 per share x 10 million shares = $100 million]. However, the balance sheet would continue to list the 'value' of those 10 million shares at $50 million.

On the other hand, if the stock dropped to $2.50 per share, thus reducing the investments to $25 million, the balance sheet value would be written down to reflect the lower price.

• Equity Method (If Federated owned 21-49%):
In most cases, Federated would include a single-entry line on their income statement reporting their share of Saks' earnings. For example, if Saks earned $100 million and Federated owned 30 percent, they would include a line on the income statement for $30 million in income [30% of $100 million], even if these earnings were never paid out as dividends [meaning they never actually saw $30 million].

• Consolidated Method (If Federated owned 50+%):
The company would be required to include all of the revenues, expenses, tax liabilities, and profits of Saks on the income statement. It would then include an entry that deducted the percentage of the business it didn't own. If Federated owned 65% of Saks, it would report the entire $100 million in profit, and then include an entry labeled minority interest that deducted the $35 million [35%] of the profits it didn't own.

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