The Income Statement

Index

The Income Statement
Analysis
Glossary

The income statement or profit and loss statement shows the amount and source of earnings for the company over a certain period of time, usually a calendar quarter or year. The earnings performance of a company is typically the fundamental basis on which a stock is valued.

Buxton Transportation Company, Incorporated

Consolidated Statement of Income

In thousands          Year Ended December 31       2005           2004

Net Sales/Revenues

   Passenger                                   $ 125,000      $ 115,000
   Freight                                        65,000         77,000
   Other                                           6,000          8,000

Total revenues                                   196,000        200,000

Operating Expenses

   Labor and employee benefits                    64,000         68,000
   Supplies and services                          17,000         18,000 
   Fuel                                           20,000         24,000
   Depreciation and amortization                   7,000          6,000
   Selling and general expenses                   12,000         15,000
   Other                                           5,000          7,000

Total operating expenses                         125,000        138,000

Operating income (loss)                           71,000         62,000

Interest expense                                (  4,000)       ( 7,000)

Other income                                       2,000          3,000

Income (loss) before taxes                        69,000         58,000

Provision for Income tax                          32,000         23,000

Net Income                                      $ 37,000       $ 35,000

Earnings per share                                $ 1.85        $ 1.75

Analysis

Earnings per share(Eps) increased about 5.7% for Buxton, year over year. It
appears that the earnings increase resulted from a greater decline in
operating expenses than the decline in operating revenues.

Why did revenues decline? Is this an aberration due to extraordinary events occurring in 2005 or is the company losing market share to it competitors? Passenger revenues increased where freight and other business segments declined. This might call for a refocusing on higher growth business. Most annual reports include a summary of operational results over previous periods where trends can be indicated.

The tax rate, income tax as a percent of earnings before taxes, increased from approximately 40% in 2004 to 46% in 2005. What accounted for the this? Perhaps the company had tax losses carry-forwards from prior years or other credits in 2004 which resulted in the lower tax rate. The "notes to financial statements" might give further details.

There are many other elements of the income statement that should be examined for a more complete analysis; especially when viewed relative to Buxton's previous and projected operations and, comparisons with other companies in the same industry. Examine the statements of a real life corporation. Keep in mind that income statement analysis goes hand-in-hand with the balance sheet and other statements, as we shall see.

Income Statement Glossary

Cost of sales or Cost of goods sold

This figure does not appear on Buxton's income statement but it commonly appears on those of manufacturing and merchandising firms. Cost of sales is the overall cost of manufacturing the product or of acquiring merchandise for sale. Rather than grouping all of these expenses under one category, Buxton shows these amounts individually under operating expenses.

Depreciation and amortization

Depreciation is a periodic non-cash expense providing for the wear and tear of an income producing asset (machinery, building, airplane, etc.) as it declines in value over time. Amortization assigns the cost of intangible fixed assets to expenses, such as patents, copyrights and leasehold improvements as useful life decines.

Earnings per share (Eps)

Eps is calculated by dividing net income available to the common stock by the average number of common shares outstanding. This means that the amount of dividends on the preferred stock must first be deducted from net income before calculating Eps.

Income (Earnings) before income taxes (EBT)

Operating profit minus interest expense plus other income equals EBT which more accurately reflects management effectiveness since the company has little or no control over the income tax rate.

Income Statement or Profit and Loss Statement

This statement shows the results of operations for a particular accounting period. The revenues received and the expenses paid are presented. The statement can take different forms, depending on the type of business that the company is in.

Interest expense

This is interest paid on the long-term debt, such as in Buxton's case, interest charges on the Equipment Trust Certificates and the First Mortgage bonds.

Net Income

Net income or net profit is the "bottom line." This is the amount available to pay dividends on the preferred and common stock. The dividend policy of the company governs how much of profits will be paid out in dividends and how much will be retained in the business.

Net Sales/Operating Revenues

This amount is generated from the sales of products/services produced by the primary operations of the company. "Net" indicates that the gross sales amount has been reduced by amounts for returned goods, allowances and discounts.

Operating Profit

This is income generated from the company's usual operations, separate from income from other sources. It is the excess of operating revenue over operating expenses.

Operating Expenses

Expenses of producing the product or service. They include the cost of goods sold, depreciation expense and selling and administrative expenses.

Other Income

This is income received outside of the normal business operations of the company. For example dividends and interest on investments would be other income since Buxton's main business is not financial.

Selling, general and administrative expenses

Expenses such as sales personnel salaries, commissions, advertising, travel and entertainment are selling expenses; administrative expenses include executive and office payrolls and other office expenses.

Provision for income tax

The actual tax rate that a company pays can differ from the statutory tax rate. Tax credits, carry forwards, penalties, etc., can cause the actual tax rate to vary from year-to-year.