| Preview: Analyzing an Income Statement |
| Here's a Sneak-Peak at the Upcoming Lesson 4 |
As I'm writing Lesson 4, Analyzing an Income Statement, I continue to receive wonderful letters, comments and suggestions from readers. Here's a sneak peak at the first page or so of the upcoming lesson. I hope you enjoy it! There's much more to come.
Total Revenue
The first line on any income statement is an entry called total revenue or total sales. This is the amount of money a business brought in through sales or services. It is not a profit figure, but rather a measure of how much was rung up at the company’s cash registers. The revenue figure is particularly important because a business must be bringing in money in order to turn a profit.
Many companies will break the total revenue up into categories, so analysts can track how much was brought in by each segment of the business. Starbucks’ 2001 income statement is an excellent example.
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Starbucks Coffee In thousands except earnings per share |
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Fiscal year ended |
Sep 30, 2001 |
Oct 1, 2000 |
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Net Revenues |
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Retail |
$2,229,594 |
$1,823,607 |
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Specialty |
419,386 |
354,007 |
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Total net revenues |
2,648,980 |
2,177,614 |
Clearly defined and separated revenues sources can make analyzing an income statement much easier. To understand what each entry means, and investor will need to read the accompanying notes. In Starbucks’ case, management explained the difference between “retail” and “specialty” five pages before the income statement.
Cost of Revenue / Cost of Sales / Cost of Goods
Sold (COGS)
The next entry may vary in name depending upon the type of business you are
analyzing, but the basic premise is the same. The cost of revenue is the amount
of money
the company had to spend in order to sell the product. It includes the purchase
price for the raw material as well as the expense incurred to manufacture it
into a product.
Gross Profit
The gross profit is the total revenue subtracted by the cost of obtaining that
revenue. It tells you how much money the business would have made if it didn’t
pay any other expenses such as salary, income taxes, etc. The gross profit
figure is important because it is used to calculate something called Gross
Margin, which will discuss next.
Gross Profit should be broken out and clearly labeled on the income statement. Here’s the formula to calculate it yourself:
Total Revenue - Cost of Revenue = Gross Profit
Next Page: Calculating Gross Margin
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