FINANCIAL STATEMENT ANALYSIS

Faculty of Banking and Finance

Lecturer: MSc. Nghiem Anh Thu
 CHAPTER 3
THE INCOME STATEMENT

01 02 03 04
OVERVIEW PRINCIPLE OF CALCULATING EPS NON-RECURRING ITEMS
REVENUE & EXPENSE
UNDERSTANDING
RECOGNITION
INCOME STATEMENT

2
 01. INCOME STATEMENT OVERVIEW

1.1 Income Statement Introduction

1.2 Component of Income Statement

1.3 Presentation format

3 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 1.1 INCOME STATEMENT INTRODUCTION

Definition:
❑ The income statement reports the revenues
and expenses of the firm over a period of
time
❑ Income statement & Statement of other
comprehensive income → single Statement
of comprehensive income
❑ Why analyze Firm’s Income statement?

4 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 1.1 INCOME STATEMENT

Company
Income Statement
Year
❖ Revenue ❖ Cost of Good Sold
❖ Financial Income ❖ Financial Expenses
❖ Other Income ❖ Selling Expenses
❖ Administration Expenses
❖ Other expenses

❖ Net Accounting Profit before Tax

❖ Income Tax
❖ Net income

Net income = Revenue – Expenses

5 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 1.1 INCOME STATEMENT

6
 1.2 COMPONENT OF INCOME STATEMENT

❑ Revenues
❑ Expenses
❑ Gains
❑ Losses
❑ Noncontrolling interest

❖Net income = Revenues – Ordinary expenses + Other income – Other expenses + Gains - Losses

7 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 1.3 PRESENTATION FORMATS

❑ Single step or Multi-step format

❑ Gross profit = Revenue – COGS
❑ Operating profit/ income = Gross profit – Operating expenses
❑ Net income/ earnings/ bottom line = Operating profit – Interest expense – Income taxes

8 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 CHAPTER 3
THE INCOME STATEMENT

01 02 03 04
OVERVIEW PRINCIPLE OF CALCULATING EPS NON-RECURRING ITEMS
REVENUE & EXPENSE
UNDERSTANDING
RECOGNITION
INCOME STATEMENT

9
 02. PRINCIPLES OF REVENUE AND EXPENSE RECOGNITION

2.1 Revenue Recognition

2.2 Expense Recognition

2.3 Implications for financial analysis

10 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.1 REVENUE RECOGNITION

Situation How revenue is recognized

Where goods are exchanged for cash ?

Where a sale of goods is made on credit ?

Where payment for goods is received prior to the ?

transfer of the goods

11 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.1 REVENUE RECOGNITION

Situation How revenue is recognized

Where goods are exchanged for cash Cash & Revenue

Where a sale of goods is made on credit Account receivables & Revenue

Where payment for goods is received prior to the Cash & Unearned Revenue

transfer of the goods

12 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.1 REVENUE RECOGNITION

▪ Under IFRS, principles-based approach is applied to

revenue recognition

▪ Revenue is recognized as the goods or service are

transferred to the buyer/ customers

▪ Company should recognize revenue only when it is highly

probable they will not have to reverse it

➢ Accrual Accounting Principle: Revenue should be

recognized when earned

13 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.1 REVENUE RECOGNITION

❖ 5-step process for recognizing revenue

1. Identify the contract(s) with a customer
2. Identify the separate or distinct performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

14 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.1 REVENUE RECOGNITION

❖ Disclosures requirements

1. Contracts with customers by category

2. Assets and liabilities related to contracts, including balances and

changes

3. Outstanding performance obligations and transaction prices allocated to

them

4. Management judgements used to determine the amount and timing of

revenue recognition, including any changes to those judgements

15 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.2 EXPENSE RECOGNITION

▪ Matching principle: Expense to

generate revenue are recognized in
the same period as the revenue

▪ However, period costs (ex:

administrative costs) are expensed
in the period incurred

16 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.2 EXPENSE RECOGNITION

❑ Inventory expense

❑ Depreciation expense

❑ Amortization expense

❑ Bad debt expense and warranty expense

17 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 2.3 IMPLICATIONS FOR FINANCIAL ANALYSIS

❑ Reasons for a change in an expense estimate

❑ Compare with peer

18 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 CHAPTER 3
THE INCOME STATEMENT

01 02 03 04
OVERVIEW PRINCIPLE OF CALCULATING EPS NON-RECURRING ITEMS
REVENUE & EXPENSE
UNDERSTANDING
RECOGNITION
INCOME STATEMENT

19
 3. CALCULATING EPS

❑ Earnings per share (EPS): One of the most used corporate profitability
performance measure for publicly-traded firms

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 −𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

❑ 𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

❑Example: p40 CFA FSA

20 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 3. CALCULATING EPS

❑ Diluted EPS: Understand concept of Dilutive securities & Antidilutive securities

𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒

❑𝐷𝑖𝑙𝑢𝑡𝑖𝑣𝑒 𝐸𝑃𝑆 =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑚𝑚𝑜𝑛 𝑎𝑛𝑑 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

❑Adjusted income available for common share = Net income – Preferred dividends +
Dividends on convertible preferred stock + After-tax interest on convertible debt

❑Example: CFA FSA p43

21 Lecturer: MSc. Nghiem Anh Thu Faculty of Banking and Finance

 CHAPTER 3
THE INCOME STATEMENT

01 02 03 04
OVERVIEW PRINCIPLE OF CALCULATING EPS NON-RECURRING ITEMS
REVENUE & EXPENSE
UNDERSTANDING
RECOGNITION
INCOME STATEMENT

22
THANK YOU

Lecturer: MSc. Nghiem Anh Thu

nghiemanhthu@ftu.edu.vn