1. Financial Statement Analysis I: Chapter 3 ©NACM

2. General Chapter Notes A. Contents of Chapter 3 B. Relevance of Analysis of the Income Statement for Trade Creditors 1. Effects when the debtor makes a profit, big and small 2. Effects when the debtor takes a loss, small and large Slide 3-1

3. Notes on Particular Parts of Chapter 3 A. What Income Reporting to Expect from Publicly-Traded Firms B. Reported Profits is Not Cash Flow (Again) C. Subtotals on the Income Statement D. Drivers of Changes in Dollar Sales for Retailers Slide 3-2

4. Notes on Particular Parts of Chapter 3 (continued) E. An Example Income Statement with Some Useful Subtotals Dollars % of Sales Sales $100,000 Cost of Goods Sold $70,000 ----------- Gross Profit $30,000 30.00% Selling and Admin. Exp. $10,000 Repairs, etc. $2,000 Other Operating Expenses $2,500 ----------- EBITDA $15,500 15.50% Depreciation $7,000 ----------- EBIT (Operating Profit) $8,500 8.50% Interest Expense $2,000 ----------- EBT $6,500 6.50% Taxes $2,275 ----------- Net Earnings (Net Income) $4,225 4.23% Slide 3-3

5. Notes on Particular Parts of Chapter 3 (continued) F. Why Expenses Appear on the Income Statement in the Order They Do G. Other Income or Expense and Special Items H. Equity Earnings I. Earnings per Share, Basic and Diluted J. Comprehensive Income K. Adjustments to Equity and the Implications of Issuing New Equity Financing and Share Repurchases Slide 3-4

6. Problem 3.12 Income Statement for Jackrabbit, Inc. Dollars Percent of Sales Net Sales $1,840,000 Cost of Goods Sold $1,072,000 -------------- Gross Profit (Gross Margin) $768,000 41.74% General and Admin. Exp. $155,000 Selling Expenses $270,000 ----------- EBITDA $343,000 18.64% Depreciation $24,000 ----------- EBIT (Operating Profit) $319,000 17.34% Slide 3-5

7. Problem 3.12 (cont.) Jackrabbit, Inc. Income Statement (continued) Dollars Percent of Sales EBIT (Operating Profit) $319,000 17.34% Other Income (Expense) Gain on Sale of Equipment $15,000 Interest Income $13,000 Equity Losses ($9,000) Interest Expense ($16,000) ------------ EBT $322,000 17.50% Income tax expense $96,000 ----------- Net Earnings (Net Income) $226,000 12.28% Cash Dividends $100,000 ----------- Change in Retained Earnings $126,000 Slide 3-6