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Income Statement
by WealthEffect Staff

 
 

The income statement (or statement of operations) is included in the company reports
 
  Revenues, costs, and profits are reviewed  
  Details, beyond the numbers, are available in Management's Discussion  
 
1.

The income statement is a part of the annual report, the 10-K and the 10-Q. The balance sheet and statement of cash flows are included, as well.
 
 
2.

This income statement, is effectively a budget. First, there is the money coming in — sales. Then, there is the money that has been spent to generate these sales: for production (cost of goods sold), for operations (selling, general and administrative expenses), for borrowed money (interest expense), for the right to operate (tax expense).

Whatever is left over after the employees, the lenders and the government have taken their share is the net income. This belongs to the investors in the company, the stockholders. Dividing the net income by total number of shares outstanding determines the earnings per share (eps).

 
 
3.

This simple budget becomes more complicated in the real world. Consider our example, Coca-Cola, which operates an easy-to-understand business. Yet, when you get into the details of Management's Discussion and Analysis, some challenges arise.

Coke has a brilliant corporate structure, just not a simple one. It produces concentrate which it sells to a network of bottlers around the world. Although it doesn't control these bottlers, it owns a stake in each and enjoys varying degrees of influence. When these bottlers sell stock to the public or swap assets among themselves, this creates non-recurring gains or losses — and Coke records its share of these gains/losses on its income statement. Coke also recognizes its share of the recurring equity income that the bottlers earn from operating their businesses.

Both these one-time gains and this on-going equity income have fluctuated widely in recent years, raising the question of how they should be viewed by investors. Although the numbers are erratic, they shouldn't be ignored. One approach is to separate the bottling investments from the basic business and value them separately. Another approach is to treat all income the same. Both approaches lead to a similar decision.

To see Coca-Cola's Income Statement Summary, click here.

Suggestion: Go to Balance Sheet