Introducing the Income Statement
Back to Basics, Part 10

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Back to Basics Series

By Vince Hanks
March 16, 2000

Like Jason behind the hockey mask, the basics are back with a vengeance! This time, the Income Statement is the prey. The income statement brings public the results of a company's business operations for a particular quarter or year. Through the income statement, you can witness the inflow of new assets into a business and measure the consumption of assets that result from the production of revenue.

As with most elements of financial statements, the key to quality assessment of an income statement is looking for trends over time. Compare the most recent statement with those of like periods in prior years to gauge the direction and progress of a company's business operations.

Revenues and expenses are recorded on an income statement at the time they are earned or incurred, regardless of when actual assets change hands. This is in accordance with the Accrual Accounting methods as discussed in Back to Basics, Part II.

We'll list each element of an income statement with a brief discussion below and then look much more closely at each category in the coming weeks. If you wish to follow along with an actual income statement as we go, click here for a recent SEC filing from Intel (Nasdaq: INTC). Note that each category will not appear on every income statement.

Sales or Operating Revenues: Net sales or service revenues.

Cost of Goods Sold: The amount the company paid in the production of goods it sold. Costs may include labor, materials, overhead, and depreciation.

Gross Profit: Total revenue of a business less cost of goods sold and selling and administrative expenses. Gross profit does not include income from incidental sources.

Operating Expenses: The expenses incurred in running the business. Operating expenses include selling and administrative expenses but exclude interest, taxes, and cost of goods sold.

Operating Revenues: Revenues from any regular business source.

Operating Income: The difference between normal business revenue and operating expenses. Excluded are expenses such as interest and taxes, as well as any unusual income such as gains from selling a subsidiary.

Other Revenues: Increases in assets resulting from transactions not directly related to operations. Interest earned on investments is an example of Other Revenues.

Other Expenses: Decreases in assets resulting from transactions not directly related to operations. Debt interest is an example of Other Expenses.

Income Before Taxes: Reported income before deducting income taxes.

Income Tax Expense: Provision for taxes on pretax income.

Income From Continuing Operations: After-tax income from operations that will continue.

Discontinued Operations: After-tax gain or loss on a portion of the business that is intended to be sold.

Extraordinary Items: After-tax gains or losses on nonrecurring transactions.

Net Income:
The sum of all reported gains and losses.

Earnings Per Common Share: Net income divided by the average number of shares outstanding.

Diluted Earnings Per Common Share: Net income divided by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of common stock.

That wraps up the introduction to the income statement. Tune in next week and we'll put each category under the electron microscope for a much closer look.

Drip on, Fools!

Drip Portfolio

3/16/2000 Closing Numbers
Ticker Company Dly Pr Chg Price

  Day Week Month Year
To Date
Drip 5.60% 9.22% 11.07% 17.48% 52.62% 17.39%
S&P 500 4.76% 4.54% 6.74% -.73% 55.36% 18.19%
S&P 500(DA) 4.76% 4.54% 6.74% -.73% 57.98% 18.94%
S&P 500(DCA) n/a n/a n/a n/a 28.48% 9.97%
NASDAQ 2.94% -6.56% .44% 15.93% 200.55% 51.80%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg

Trade Date # Shares Ticker Cost Value LT $ Val Ch
  Cash: $24.47  
  Total: $5,285.68  

• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.