In this video, learn how to identify the components of the income statement. This includes various income to the organization.
- The income statement contains two items, revenues and expenses. Revenues minus expenses equals net income. Now the income statement is constructed using a very careful sequencing of the reported revenues and expenses to highlight important profit measures. Let's look at the actual income statement for Walmart for the years ended January 31, 2019, 2018, and 2017. Typically, when a company presents an income statement, the company reports information for three years so that the financial statement user can spot trends. And when you look at an income statement, you should look at two numbers first. The top one, sales, and the bottom one, net income. The top number here, sales, is the total amount that Walmart sold to you and me and other people around the world during the year, $510 billion. By the way, that's the world record. No company in the history of the world has ever sold more than that in one year. By comparison, Apple sales during the same year were $266 billion. The bottom number here is called net income. That number is $7.179 billion. You've heard of the bottom line. Well, this is where the phrase bottom line comes from. Net income is the measure of economic performance of Walmart. A good way to interpret the net income number is that Walmart generated economic value of $7.179 billion during the year. Now let's look at Walmart's detailed expenses. In your mind, go into a Walmart store. Let's say that we go in and buy stuff with a total selling price of $100. The first thing Walmart has to do is to pay their supplier for the thing that you just bought. That's called cost of sales. In this income statement, the cost of sales is $385 billion. Think of sales as the retail selling price and cost of sales is the wholesale purchase cost that Walmart had to pay to buy the items. What else does Walmart have to pay for out of the $100 that they just got from us? Well, they have to pay the cashier. They have to pay the store manager. They have to pay for the electricity. They have to pay for property taxes. They have to pay for advertising. These expenses are reported here under the heading, operating, selling, general, and administrative expenses, totaling over $107 billion. Now Walmart is left with what's called their operating income, almost $22 billion, in this case. Total revenue is over $500 billion, but after the suppliers are paid, the cost of sales, and after all of the administrative expenses are paid, Walmart is left with just $22 billion, but we're not done with Walmart's expenses. They borrowed some money, so they have to pay some interest. The interest amount is a little over $2 billion. Now we see a row for other miscellaneous gains and losses, although for Walmart, unfortunately, the amounts are only losses. Why doesn't Walmart just lump these in with the operating, selling, general, and administrative expenses above? Because Walmart is being careful to tell the financial statement user that these losses stem from unusual, one-time things that are not expected to repeat in the future. Okay, now we are down to a bit more than $11 billion labeled as income before income taxes, but Walmart has to pay its income taxes. The total income taxes from Walmart for this year are $4.281 billion. Most of this is paid to the U.S. government, but Walmart also pays income taxes in many other countries around the world in which it operates. The final remainder, the amount of net income that belongs to Walmart's shareholders is $7.179 billion. Okay, let's do a little interpretation of these numbers. If I pay Walmart $100 for something, how much did that thing cost Walmart? Well, we can find that out by dividing cost of sales by net sales. The answer's about 75%. In other words, if Walmart sells you and me something for $100, Walmart has to pay its suppliers $75 to buy that thing. Now we now know quite a bit about Walmart's business just by looking through their income statement.
- Describe line items that appear on financial statements.
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- Interpret current accounting issues and trends.
- Calculate the market capitalization of a company.
- Identify the most important expense for a retail company.
- Explain the use of common size financial statements.