Income Statement

As I explained previously in the Balance Sheet (part 1), once a year publicly listed companies are required to provide an Annual Report to its share holders. This report contains all the pertinent information to inform the share holders about the health of the company. In the beginning of the annual report we find charts followed by a message from the Chief Executive Officer. For the share holders two most important statements in the annual report are 'Balance Sheet" and “Income Statement". Income statement is also known as Profit and Loss Statement". Here I will try to explain some of the items included in the Income Statement.

 We will start with an Income Statement of any one public company. Here I am going to present an Income Statement of Google.

 

Income Statement Get Income Statement for:
View: Annual Data | Quarterly Data All numbers in thousands   PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06 Total Revenue 21,795,550   16,593,986   10,604,917   Cost of Revenue 8,621,506   6,649,085   4,225,027     Gross Profit 13,174,044   9,944,901   6,379,890       Operating Expenses   Research Development 2,793,192   2,119,985   1,228,589     Selling General and Administrative 3,748,883   2,740,516   1,601,305     Non Recurring -   -   -     Others -   -   -         Total Operating Expenses -   -   -             Operating Income or Loss 6,631,969   5,084,400   3,549,996           Income from Continuing Operations     Total Other Income/Expenses Net (778,373) 590,783   461,301       Earnings Before Interest And Taxes 5,853,596   5,675,183   4,011,297       Interest Expense -   1,203   257       Income Before Tax 5,853,596   5,673,980   4,011,040       Income Tax Expense 1,626,738   1,470,260   933,594       Minority Interest -   -   -           Net Income From Continuing Ops 4,226,858   4,203,720   3,077,446           Non-recurring Events     Discontinued Operations -   -   -       Extraordinary Items -   -   -       Effect Of Accounting Changes -   -   -       Other Items -   -   -             Net Income 4,226,858   4,203,720   3,077,446     Preferred Stock And Other Adjustments -   -   -         Net Income Applicable To Common Shares $4,226,858   $4,203,720   $3,077,446

 

All the numbers shown above are in thousands.

 

Let us look at individual items in the income statement. In this blog I will give you details only about the main items. Additional details will be discussed in the future blogs. Look at the second line in the income statement under the heading Period Ending. Here the numbers are shown for the years ending in December of 2006, 2007 and 2008.  

 

Right after period ending line we see a line showing “Total Revenue” for the years 2008, 2007 and 2006.  This total revenue line is also referred to as ‘Top Line”. Near the bottom of the income statement we see a line showing “Net Income”.  This net income line is also referred to as “Bottom Line”.  I am sure you have heard people talking about being interested in the bottom line only. It is true that we are interested in the bottom line which gives the profit picture, but if the top line keeps declining, sooner or later bottom line will suffer too.

 

Now let us look at the details of total revenue for all the three years. Note that the total revenue for the year 2008 was approximately $21 billion, which is more than $16 billion for the year 2007 and $10 billion for the year 2006. This indicates that the company’s results are improving.

 

Now let us look at the line showing Gross Profit.  Here too we see the results improving from $6 billion in 2006 to $13 billion in 2008.  In just two years gross profit more than doubled.  Note that the gross profit could be increased by controlling “cost of revenue”, which is a direct cost incurred to support server farms and costs related to drive traffic to Google’s web site.

 

Now let us look at the line showing Operating Income or Loss.  Here too an operating income went up from approximately $3 billion to $6 billion (roughly 86 %). Here the result is arrived at  after deducting general, administrative and research costs.

 

Net Income (bottom line) improved nicely from 2006 to 2007, but did not improve much from 2007 to 2008.  Everyone knows that the year 2008 was a year of recession and majority of the companies lost money instead of any profit.  Even after paying $156 million more in taxes, Google improved its earnings by about $23 million.  They did this by cutting labor force and cutting costs wherever they could.  Overall this company performed well.

 

Whether to invest or not to invest money in any company is your own decision. I am just trying to explain several items included in the income statement.