Financial Reporting &

Analysis
Income statement

Dr. Nasser Abdelkarim.

student: kholoud labady
Overview
• The income statement is often considered to be the most important
financial statement.

• Income statement
statement of operating

P& L statement

statement of earning
Basic elements of income statement

An income statement summarizes revenues and expenses and gains and losses,
and ends with the net income for a specific period.
Analyzing income statement

Tell us:

Is the company making money?

Are sales and/ or profit growing?
What are the company expenses?

Can predict future profits and value the company.

Income statement performance

Net sales (revenues)
Sales or revenues are the income a company generates from selling its products or services. This is
a crucial component of a company's financial health and is often displayed on the income
statement. Net sales are the total sales minus any deductions like discounts, returns, or
allowances, providing a more accurate picture of the actual revenue earned by the company.
Monitoring these figures is essential for understanding a company's performance and trends over
time.

Cost of goods sold

This category shows the cost of goods sold to produce revenue. For a retailing firm, the cost of
goods sold equals beginning inventory plus purchases minus ending inventory. In a manufacturing
firm, the cost of goods manufactured replaces purchases since the goods are produced rather than
purchased. A service firm will not have cost of goods sold or cost of sales, but it will often have
cost of services.
Other operating revenue
Depending on the operations of the business, there may be other operating revenue, such as lease
revenue and royalties.

Operating revenue isn't solely derived from sales of goods or services. Depending on the nature of
the business, there can be other streams of revenue that contribute to the overall income. Lease
revenue from renting out properties, equipment, or assets, as well as royalties obtained from
licensing intellectual property, can significantly contribute to a company's operating income.

Operating Expenses
operating expenses consist of two types: selling and administrative. Selling expenses, resulting
from the company’s effort to create sales, include advertising, sales commissions, sales supplies
used, and so on. Administrative expenses relate to the general administration of the company’s
operation. They include office salaries, insurance, telephone, bad debt expense, and other
costs difficult to allocate
 Other Income or Expense
In this category are secondary activities of the firm that are not directly related to the
operations. For example, if a manufacturing firm has a warehouse rented, this lease income
would be other income. Dividend and interest income and gains and losses from the sale of
assets are also included here. Interest expense is categorized as other expense.

Rental Income: When a manufacturing firm leases out its unused space or assets.

Investment Income: Dividends and interest earned from investments made by the company.

Gains/Losses from Asset Sales: Profits or losses incurred from selling assets not directly related
to the company's core business.
Single step income statement:

A single-step income statement lists

all revenues and gains (usually in
order of amount) and then lists all
expenses and losses (usually in order
of amount). Total expense and loss
items deducted from total revenue
and gain items determine the net
income.
Multiple step income statement

For firms that have cost of

goods sold, cost of goods
manufactured, or cost of
services, a multiple-step
income statement should be
used for analysis. The
multiple-step format provides
intermediate profit figures
useful in analysis.
 Special income statement items
To comprehend and analyze profits, you need to understand income statement items that require
special disclosure

Note that some of these items are presented before tax and some are presented net of tax.

(A) Unusual or Infrequent Item Disclosed Separately

(B) Equity in Earnings of Nonconsolidated Subsidiaries
(C) Discontinued Operations
(D) Extraordinary Items
(E) Change in Accounting Principle
(F) Net Income—Noncontrolling Interest (previously minority
share of earnings
(A) Unusual or Infrequent Item Disclosed Separately
is an accounting term used to refer to a significant event or transaction that is not expected to
regularly occur within the normal course of business. It's an item that is reported separately in
a company's financial statements because it doesn't reflect the usual, day-to-day operations of
the business.

These items could include one-time expenses or revenues, such as restructuring costs, gains or
losses from the sale of assets, or extraordinary events that aren't part of the company's typical
business activities. The separation of such items allows stakeholders to better understand the
company's regular operational performance by excluding these exceptional events.
 B) Equity in Earnings of Nonconsolidated
Subsidiaries
refers to the portion of profits belonging to an investor company from its ownership in
subsidiaries where the investor does not have a controlling interest. When a company owns a
significant but not a controlling stake (usually between 20% to 50%) in another business, it's
accounted for using the equity method.

Under the equity method, the investor recognizes its share of the subsidiary's profits or losses
in its financial statements. This is represented as a line item in the investor's income
statement, typically referred to as "Equity in Earnings of Nonconsolidated Subsidiaries." The
investor reports its proportional earnings from the subsidiary, considering dividends received
and changes in the subsidiary's net income.

This approach provides a way for the investor to reflect the economic reality of its partial
ownership in another company, even though it doesn't exercise control over the subsidiary's
operations
 (C) Discontinued Operations
refers to a component of a business that has either been disposed of or is being held for sale,
and it's separate from the ongoing operations of the company. When a company decides to sell,
abandon, or otherwise dispose of a significant portion of its operations, and it represents a
strategic shift that will have a major effect on its financials, the results of this discontinued
segment are reported separately in the financial statements.

Financial results from discontinued operations are shown separately on the income statement,
under a distinct line item. This includes the income or loss generated from the operations up to
the disposal date. The purpose is to provide investors and stakeholders with clear visibility into
the financial effects of the discontinued segment and to distinguish these one-time events
from the ongoing operations of the company.
 (D) Extraordinary Items

Extraordinary items are material events and transactions distinguished by their unusual nature
and by the infrequency of their occurrence. Examples include a major casualty (such as a fire),
prohibition under a newly enacted law, or an expropriation. These items, net of their tax
effects, must be shown separately. Some pronouncements have specified items that must be
considered extraordinary; an example is a material tax loss carryover. The effect of an
extraordinary item on earnings per share must also be shown separately.
 (E) Change in Accounting Principle

handling changes in accounting principles is a fundamental aspect of financial reporting. The

decision to shift accounting principles could arise due to new standards set by regulatory bodies or
voluntary shifts within the company. The process of handling these changes within financial
statements is crucial for accurate and transparent reporting.

In many cases, the approach adopted involves a retrospective adjustment, which means revising
prior years' financial statements in the year of change. This adjustment ensures consistency and
comparability within the financial statements, allowing for more accurate analysis. The cumulative
effect of this change is typically reflected in the beginning retained earnings of the year in which the
change occurs.

However, there are instances where applying the retrospective approach might not be feasible. In
such cases, adjustments to opening balances in the accounts are made, with the cumulative effect
being reflected in the opening retained earnings of the year of change. This alternative method
avoids revising prior years' financial statements, preserving their original values.

These different approaches aim to maintain the integrity and accuracy of financial reporting while
adapting to changes in accounting principles, ensuring transparency and consistency for stakeholders
and analysts.
 (F) Net Income—Noncontrolling Interest
(previously minority share of earnings

when a company consolidates its financial statements and includes the financials of its
subsidiaries (even those that aren't wholly owned), it combines the revenues and expenses of
these subsidiaries with its own. However, to accurately represent the earnings attributable to the
parent company, the portion of income that belongs to the noncontrolling interest (or minority
shareholders) in these subsidiaries is deducted from the total net income.

This process aims to show the actual earnings that pertain to the parent company, accounting for
the ownership interests of minority shareholders in the subsidiaries. By subtracting the income
attributable to these minority shareholders, the net income figure better reflects the earnings
specifically accruing to the controlling or parent company. This practice aligns with the principle
of providing a clearer view of the net income attributable to the parent company's shareholders
after considering the ownership interests in subsidiaries.
Earnings per Share

Earnings per share (EPS) is a fundamental financial metric calculated to determine the
profitability of a company on a per-share basis. The formula for EPS is indeed derived from the
net income divided by the outstanding shares of common stock:

This metric is widely used by investors, analysts, and company management to assess a company's
performance and to compare it against other firms in the industry. EPS is essential for
understanding how much profit a company is generating for each outstanding share of its
common stock.
Retained Earnings
Retained earnings represent the cumulative sum of a company's profits that have been retained
within the business since its inception, rather than distributed as dividends to shareholders. It's a
crucial component of the shareholders' equity on a company's balance sheet.

Retained earnings increase when a company generates a profit, as this profit is added to the
existing retained earnings. Conversely, it decreases when the company incurs losses or when it
pays dividends to shareholders.

These earnings are an important source of funding for a company's growth, allowing it to reinvest
in the business, pay off debts, buy back shares, or distribute dividends in the future. Retained
earnings essentially reflect the company's historical net income that hasn’t been distributed to
shareholders and is reinvested in the business to support its operations and expansion.
 Dividends and stock splits
Dividends and stock splits are two ways companies distribute value to their shareholders.

Dividends: These are payments made by a company to its shareholders from its profits or reserves.
They can be in the form of cash or additional shares. Dividends are usually declared by the company's
board of directors and can be issued regularly (like quarterly dividends) or as special one-time
payments. They are a way for the company to share its profits with shareholders.

Stock Splits: A stock split is when a company increases the number of its outstanding shares by dividing
the existing shares into multiple shares. For instance, in a 2-for-1 stock split, each existing share
would become two shares. The value of each share is reduced, but the total value of the shares
remains the same. Stock splits are often done to make shares more affordable or to increase liquidity
by attracting more investors.

Both dividends and stock splits can affect the value and perception of a company's stock in the
market. Dividends are a direct distribution of profits, while stock splits alter the number of
outstanding shares without changing the overall value of the company. Both actions are often seen as
positive signals by investors, signaling confidence in the company's financial health and potential
growth.
 Comprehensive income
is a broader measure of a company's financial performance compared to net income. It encompasses
all changes in equity (net assets) during a specific period from transactions and other events excluding
those related to owners' investments and distributions (like dividends).

It includes both net income (the traditional measure of profit from the income statement) and other
gains or losses that bypass the income statement. These can include items like unrealized gains or
losses on certain investments, foreign currency translation adjustments, certain pension adjustments,
and gains or losses on hedge instruments. These items are not part of the core operating activities but
can significantly impact the overall financial health of a company.

The comprehensive income statement starts with net income and then adds or subtracts these other
gains or losses to arrive at the comprehensive income figure. It's a more inclusive view of a company's
financial performance, giving stakeholders a broader understanding beyond the traditional net income
figure
 Financial performance results:

birzeit pharmaceutical company 2021 2020 change

sales $45,471,784 $35,854,785 $9,616,999
COGS ($28,143,555) ($22,423,426) ($5,720,129)
Gross profit $17,328,229 $13,431,359 $3,896,870

2021 2020
gross profit margin 38.11% 37.46%
sales growth percentage: (change in sales/sales in 2020)*100% 26.82%

The group achieved consolidated net revenues of US$45.5 million, compared to

US$35.9 million for the year 2020. Revenues as of 2021 increased by 27% over those
achieved by the group in the previous year. Despite the slow recovery of sectors from
the impact of “COVID-19”, in addition to the challenges Political and economic.
Financial performance results:
birzeit pharmaceutical company 2021 2020 change
Gross profit $17,328,229 $13,431,359 $3,896,870
gross profit from operating activities $10,111,320 $6,643,259 $3,468,061
net income for the year before tax $13,377,690 $8,150,884 $5,226,806
net income after tax $12,166,341 $7,375,483 $4,790,858

2020 2021
20 17.3
13.4
15
10 29%
5 2020 2021
Percentage of 15
0 increase
12.2
10 7.4 65%
gross profit (million dol-
lar) 5
Percentage of
0 increase
2020 2021 Net income (million dol-
15 lar)
10.1 53%
10 6.6
5 Percentage of
0 increase

operating profit (million