Earnings statement

The financial scandals of WorldCom, Enron, and others challenged investors confidence in corporate America. In an effort to restore some semblance of confidence in corporate earnings statements, two Wall Street powers attempted to evaluate the quality and character of earnings. On May 14, 2002, Standard Poors (S P) released its Core Earnings Test, a method that would separate a company s earnings into core and non-core classifications. 

Periodically, perhaps on a monthly basis but certainly yearly, the ledger sheets are closed and balanced. The ledger sheets are used as intermediate documents between journal records and balance sheets, income statements, and retained earnings statements, as well as information for various government reports. For example, a consolidated income statement can be prepared from the ledger revenue and expense accounts. From the asset and liability accounts, a company s balance sheet is prepared. Table 3.2 is the ledger obtained from the general journal. Table 3.1. 

We have included parts of an annual report of a fictitious company, Archem, Inc., which we use to explain the terminology and construction of a balance sheet, an income statement, and a retained earnings statement. 

The income statement may also be known as the statement of profit and loss, the earnings statement, or the statement of operations. It displays the operating activities of a company for the year and may be an indication of company s future performance. A typical statement will show the figures for the current year as well as one or two previous year s activities. Frequently, an annual report will include a 5- or 10-year summary near the end of the report. The term consolidated will appear, indicating that all the financial activities of the company and its subsidiary operations are reported in a single statement (Table 3.9) (5). 

The income statement is another important type of business financial statement. As does the balance sheet, the income statement also has different names in that it is sometimes referred to as the profit and loss statement, statement of earnings, statement... 

The income statement (Table 2.2) is also referred to as the earnings statement, profit and loss statement (P L), and statement of operations. The income statement is essentially divided into four sections ... 

Income Statement Income statements range from the veiy simple presentation shown in Table 9-16 to the more informative and more complex presentation shown in Table 9-20. The income statement shows the revenue and the corresponding expenses that were incurred to earn that revenue over a period of time. It is the most obvious measure of the efficiency of a business. Although pubhshed income statements are normally for I-year periods, many companies use monthly income statements for internal purposes. 

That vision of Manhattan Project scientists was carried forward in AEC/ERDA/DOE national laboratories, and is documented in a 1994 report by ORNL for the DOE with a statement by a former associate director It is safe to say that (ORNL) Chem Tech has played the leading role in solving the nation s reprocessing problems. When Alvin Weinberg was ORNL s Director, he used to say that one purpose ofthe laboratory was to undertake big projects of national purpose that others could not handle. Chem Tech s achievements are testimony to that and have earned the division a lasting place in the history ofthe country s atomic energy programs. 13... 

The EVA [10,11] combines information from the profit and loss statement (revenue, costs, earnings before interests and taxes (EBIT), etc.) and the financial sheet (net working capital (NWC), assets, etc.). The EVA is the interest calculation in absolute measurements and strongly related to the return on capital employed (ROCE) where the gained interest rate is calculated (Figure 1.7). In the long term, this interest rate should be above the capital costs of the company which is the interest rate the company has to pay for a credit on the capital market. Hence, a positive EVA means that the company has earned some money above the capital costs. 

To distinguish between cash flows and earnings, let us look at a grossly simplified set of financial statements for a company. The three statements are a... 

Figure B.8 illustrates the balance sheet. A balance sheet is a snapshot of the assets and liabilities at one point in time. It tells nothing about the transactions and adjustments that led to the numbers presented in the statement. A comparison of balance sheets over time can help indicate earnings.

Next, Figure B.9 represents a simplified cash flow statement for a retail computer store. The bottom number in the statement does not represent profit (income, earnings)—just the net of the cash flows, because the 30,000 mortgage payment... 

The third statement shown in Figure B. 10 is for income and expense that leads to net after-tax profits (earnings), a quantity that transfers to the balance sheet periodically in the category called equity. 

The reconciliation between the cash flow statement and the income and expense statement is as follows. Start with the 40,000 from the last line in the cash flow statement, subtract 20,000 for the depreciation expense, and add back the 30,000 mortgage loan principal payment (not an allowed expense). The result is the net after-tax earnings. Figure B.ll is a set of statements from a small oil company. The statement of operations lists revenue and expenses, whereas the balance sheet lists various assets, liabilities, and stockholders equity ( net worth ). So-called capital items such as buildings, equipment, oil and gas property, and various intangibles are assets. Operating costs are deductions from revenues for operations not including expenditures for capital items. 

A financial report contains two important documents—the balance sheet and the income statement. Two other documents that appear in the financial report are the accumulated retained earnings and the changes in working capital. All these documents are discussed in the following sections using a fictitious company. 

Income statement The statement of earnings of a firm as approximated by accounting practices, usually covering a 1-year period. 

Supposing this to be a true statement of the transformations, the subsequent decomposition—namely, the reaction of carbonata of lime upon bisulphide of sodium —must also be far more complicated than is usually supposed. It is exceedingly difficult to arrive at any positive conclusion from the views of different chemists upon this subject. It is oertain, however, that the calcination of sulphate of soda with both coal and carbonate of lime at the earns time, is by no means essential to the process if desirable, the sulphate might first he treated with coal alone, and the resulting sulphide or mixture of sulphide and carbonate be afterwards calcined with carbonate of lime,... 

The Social Security Administration sends an annual statement of earnings history and benefits estimate to every wage earner. You may also phone (800) SSA-1213 or visit the Social Security web site (www.ssa.gov) to request a customized benefits estimate. Also, your employer s pension plan administrator will provide an estimate of your pension benefits. 

The income statement is a dynamic document that provides information about money coming into an organization (income) and money necessary to obtain that income expensed). The difference between income and expenses is commonly referred to as net income, net profit, or earnings. The income statement tells the reader what happens to an organization over a period of time. While organizations generally create income statements that span their fiscal year, they often create income statements that describe revenues, expenses, and net income over shorter periods of time, such as quarters, months, weeks, or even over a single day. 

It also shows the net income for year 1. It is important to understand that the terms net income and earnings are used interchangeably in financial reports. You will note that the net income for year 1 is 300,000. The balance sheet (Table 15-2) shows retained earnings of 200,000. This is the portion of the net income that the owners have reinvested in the business. Where did the rest ( 100,000) of the net income go It was redistributed among owners as dividends (as depicted in Table 15-4). The connection between the net income value from the income statement and retained earnings from the balance sheet is an example of how these two reports are linked. In this particular example, the details of this linkage can be examined by the statement of retained earnings (Table 15-4). 

Table 15-4. Whole Health Partners Statement of Retained Earnings for Year 1 ( )...

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