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Financial Statement AnalysisModule 2 of 9

Analyzing Income Statements

6

Concepts

6

Formulas

1

Decisions

4

Quiz Questions

Key Concepts

6 concepts covered in this module.

Revenue Recognition

IFRS 15 / ASC 606: 5-step model. Recognize when performance obligation satisfied and control transfers to customer.

Expense Recognition (Matching)

Expenses matched to the revenues they help generate. Period costs expensed immediately; product costs match to sales.

Capitalization vs Expensing

Capitalizing: asset on BS, depreciated over time (higher initial income). Expensing: immediate IS charge (lower initial income).

Basic EPS

Net income attributable to common / Weighted average common shares outstanding. Measures profit per share for common shareholders.

Diluted EPS

Assumes all dilutive securities (options, convertibles) are converted. Always ≤ Basic EPS. Treasury stock method for options.

Common-Size Income Statement

Express each line as % of revenue. Enables comparison across companies of different sizes and over time.

Formulas

6 essential formulas for this module.

Basic EPS

Basic EPS = (Net Income - Preferred Dividends) / Weighted Avg Common Shares

Where: Only common shareholders' income

Diluted EPS (Convertible Bonds)

Diluted EPS = (NI - PD + Interest×(1-t)) / (WACS + New shares from conversion)

Where: If-converted method: add back interest, add converted shares

Diluted EPS (Options)

Treasury Stock Method: New shares = Options exercised - Shares repurchased with proceeds

Where: Net new shares = N - (N×Exercise Price / Market Price)

Gross Profit Margin

GPM = (Revenue - COGS) / Revenue

Where: Measures production efficiency

Operating Margin

Op Margin = Operating Income / Revenue

Where: Includes SG&A and other operating expenses

Net Profit Margin

Net Margin = Net Income / Revenue

Where: Bottom-line profitability

Decision Frameworks

1 decision frameworks to guide your analysis.

Capitalize or Expense?

  • Capitalize: future economic benefit expected (>1 year), cost reliably measurable
  • Expense: no future benefit, or benefit is uncertain

Mind Map

Visual overview of how concepts connect in this module.

Income Statement Analysis
Revenue Recognition
5-step model
Performance obligations
Control transfer
Point-in-time vs over-time
Expense Recognition
Matching principle
Capitalize vs expense
Depreciation/amortization
Interest capitalization
EPS
Basic EPS
Diluted EPS
If-converted method
Treasury stock method
Profitability
Gross margin
Operating margin
Net margin
Common-size analysis
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Revenue Recognition

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Answer
IFRS 15 / ASC 606: 5-step model. Recognize when performance obligation satisfied and control transfers to customer.
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Introduction to Financial Statement Analysis

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Analyzing Balance Sheets