lecture3 income statement analysis mdf

Lecture 3

INCOME STATEMENT

ANALYSIS

Prof. dr. Anamaria CIOBANU

The Income Statement

The income statement provides us with

information about the firms revenues and

expenses over some previous time period

(usually quarterly, semiannually, and annually)

The Income Statement

The income statement presents in a summary

form the profitability of a firm over an annual

period

The income statement equation:

Revenue – Expenses = Income

A positive difference indicates a profit.

A negative difference indicates a loss.

The Income Statement and the

Accrual Accounting

The revenues and expenses are reported based

on the principles of accrual accounting: there are

recognized as they are incurred rather than

when the cash is received or paid out

the net income will not reflect the cash

generated by the company

What is the connection between income

statement and the balance sheet?

ANGLO-SAXON APPROACH

Sales revenue

- Cost of goods sold

- Selling, general and administrative expenses

= Operating Income

+ Other revenues

-Other expenses (Except Interest)

= EBIT

- Interest payment

= EBT

- Taxes

= Net Income

ROMANIAN APPROACH

Operating revenues

- Operating expenses

= Operating income Operating Income

+ Financial Income

Financial revenues + Extraordinary Income

- Financial expenses = EBT

= Financial income - Corporate Income Tax

= Net Income

Extraordinary revenues

- Extraordinary expenses

= Extraordinary Income

How is the net income of each company obtained?

In which one should you invest?

Income statement and profit margin

French approach

Commercial margin

Value added

Operating margin

Current margin

Net margin

Income statement and profit margin

Anglo-Saxon approach

Gross margin

EBITDA

EBIT

EBT

Net income

Operating Breakeven Analysis

An analytical technique for studying the

relationship between sales revenues, operating

costs, and profits.


First of all you have to identify the company’s:

Operating fixed costs (F) :

depreciation & amortization ;

rents ;

general administrative expenses ;

executive’s salaries ;

Operating variable costs (VC) :

raw materials costs;

costs of direct labor;

Breakeven Point Computation

Sales Total operating Total Total

revenues costs variable costs fixed costs =

= +

(p x Q) = TOC = (v x Q) + F

QOpBE F

p-v =

SOpBE F

= 1-

v

p ( )


- example -

Sales (S)--(110 million units) 1,650.00$

Variable cost of goods sold (VC) (1,353.00)

Gross profit (GP) 297.00

Fixed operating costs (F) (154.00)

Net operating income (NOI = EBIT) 143.00$


- example -

QOpBE $154.0 million

$15.00 - $12.30 = =

$154.0 million $2.70

57.04 million units 57.0 million units

=


- example -

For the proposal to break even, Unilate must

sell 57 million units or $855,600,000 of product.

SOpBE $154.0

$12.30

$15.00

= = $154.0 1 - 0.82

1-

= $154.0 0.18 ( )

= 855.6 million

Operating Breakeven Point Chart

0 20 40 57 60 80 100 120

1,400

1,200

1,000

600

400

0

Units QOpBE

Revenues

& Costs

Total Fixed Costs (F)

Total Operating

Costs (F + Q x v)

Total Sales Revenues (p x Q)

SOpBE =

200 154

856 800

Operating Breakeven

Point (EBIT = 0)

Operating Profit

(EBIT > 0)

Operating Loss

(EBIT < 0)

The Usefulness of Breakeven Point

Analysis

estimates the sales needed to cover the

cost of production;

necessary in order to decide the company

expansion;

useful when the management have to

decide the start of a new investment.

The Limits of Breakeven Point

Analysis

the analysis assumes the selling price is

constant;

unit variable costs are assumed to be constant;

this analysis assumes fixed costs are the same

over time;

Degree of Operating Leverage

The percentage change in EBIT associated

with a given percentage change in sales.

Each 1 percent change in sales, will result in a

x percent change in EBIT.

Calculating the Degree of Operating

Leverage

xSalesSales

Sales

Sales

Sales

EBIT

EBIT

LOPBE0

0

0

0o

The Degree of Operating Leverage

- example -

Sales

(mil. $)

Sales

(mil. $)

Sales

(%)

EBIT

(mil. $)

EBIT

(mil. $)

EBIT

(%)

Lo

1200 -400

1500 300 25,0 -250 150 -37,5 -1,5

2000 500 33,3 0 250 -100 -3,00

3000 1000 50 500 500 Can’t be

calculated

4900 1900 63,3 1450 950 190 3,00

8800 3900 79,6 3400 1950 134,5% 1,69

17600 8800 100,0 7800 4400 129,4 1,29

Quick Quiz

Which is the most suitable income margin to be used when we compare the

companies’ profitability on a same activity sector?

Which are the usefulness of the Operating Breakeven Analysis and its

limits?

If the structure of company’s expenses is modified how will be changed the

level of sales at break even point?

What is the meaning of calculating the Degree of Operating Leverage?

An increase of company’s fixed costs will lead to a decrease or increase of

its Degree of Operating Leverage?

What will be the impact of one company’s activities outsourcing on its

breakeven point?

lecture3 income statement analysis mdf

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