Articles Index - page 2

Straight Line Depreciation Method
The straight line depreciation method is the simplest and most commonly used depreciation method. Straight line depreciation is calculated by spreading the cost of an asset out over its useful life.

Accumulated Depreciation
Accumulated depreciation is the write-down of an asset's carrying amount on the balance sheet due to loss of value from usage and age. Accumulated depreciation can best be understood by using a new car as an example.

Depreciation and Amortization on the Income Statement
Depreciation and amortization expense is recorded against earnings on the income statement in order to spread the initial purchase price of a fixed asset out over its useful life. Although depreciation expense requires no immediate cash outlay, it should not be added back to a company's profit.

Interest Coverage Ratio
The interest coverage ratio is a measurement of the number of times a company can make its interest payments with its earnings before interest and taxes. Interest coverage is calculated by dividing EBIT by interest expense.

Interest Income and Expense
Interest income and expense reflects the amount companies pay on their debt or earn on their deposit accounts. Interest income and expense is sometimes reported as net on the income statement.

Operating Income and Operating Profit Margin
Operating income is a measurement of the money a company generated from its own operations. Operating income can be used to guage the general health of the core business or businesses. Operating profit margin is another measurement of management's efficiency. The operating profit margin compares the quality of a company's operations to its competitors.

Accounting for Extraordinary and Nonrecurring Items or Events
When analyzing an income statement, you must make an accounting for extraordinary and non-recurring items and events. It is best to leave these one-time events out of the equation, basing your earnings valuation on the predictable income of the business.

Extraordinary and Nonrecurring Items or Events
Extraordinary and nonrecurring items and events arise in the ordinary course of business. When analyzing an incomes statement, you should ignore them in your valuation.

Goodwill and Amortization Charges
Goodwill and other intangible assets must be amortized on the income statement. If the goodwill becomes impaired, management will announce a write-down and reduce the carrying value on the balance sheet.

Selling, General and Administrative Expenses - SGA
Selling, general and administrative expenses, or SGA expenses for short, consist of payroll costs, salaries, commissions, travel expenses, and advertising expenses. SGA expense is recorded as an operating expense on the income statement.

Research and Development Costs - R&D
R&D, short for research and development, costs can range from nothing to billions of dollars depending upon the type of business. Research and development is listed on the income statement as an operating expense.

Operating Expense on the Income Statement
Operating expenses arise during the ordinary course of running a business. Operating expense consist of salaries paid to employees, research and development costs, and other charges that must be subtracted from revenue.

First Three Lines of the Income Statement
Analyzing the first three lines of the income statement, including total revenue, cost of goods sold, gross profit, and gross profit margin.

Sample Income Statement
The best way learn how to read financial statements is to begin with a real income statement. Here, we start with the Microsoft Income Statement. We will work our way through it line by line until you understand financial statement analysis and how to calculate financial ratios.

Gross Profit
Gross profit is the total revenue subtracted by the cost of generating that revenue, or cost of goods sold. Gross profit is used to calculate gross margin.

Cost of Goods Sold - COGS
Cost of goods sold (COGS) is the expense a company incurred in order to manufacture, create, or sell a product. Going back to our Pizza Parlor example, cost of goods sold, COGS, would include items such as flour and tomato sauce.

Total Revenue or Total Sales
Revenue or sales is the amount of money a business brought in during the time period covered by the income statement. Many companies break revenue and sales sources up by division or segment.

Investing Lesson 4: Income Statement Analysis
The primary purpose of the income statement is to report a company's earnings to investors. Income statement analysis can provide important insights into profit and expenses, operations, financial ratios and margins.

1 | 2