Course 106: A Tour through the Income Statement
Profit
In this course
1 Introduction
2 Revenues
3 Expenses
4 Profit


Net Income. This number represents (at least theoretically) the company's profit after all expenses have been paid, and thus it receives a lot of attention when companies release their quarterly results.

Preferred Dividends. Some companies issue preferred stock, which pays dividends at a specified rate (generally higher than the rate paid on common stock) but has no voting rights. Because preferred-stock dividends are paid before common-stock dividends, they are sometimes broken out as a separate line item after net income, followed by net income available to common shareholders.

Number of Shares (Basic and Diluted). This figure represents the number of shares used in calculating earnings per share; it represents the average number of shares outstanding during the reporting period (a quarter or a year). Basic shares include only actual shares of stock; diluted shares also include securities that could potentially be converted into shares of stock, such as stock options and convertible bonds. For companies that issue a lot of options (such as many technology companies), the number of basic shares can differ substantially from the number of diluted shares.

Earnings per Share (Basic and Diluted). This number, which represents net income divided by number of shares, usually gets the most attention when a company reports its quarterly or annual results. Basic earnings per share (or EPS) uses the basic number of shares for this calculation, and diluted earnings per share uses the diluted number of shares. The distinction is meant to show the effect of stock options, the expense of which otherwise doesn't show up on the income statement; the more options a company has issued, the lower its diluted earnings per share relative to its basic earnings per share. However, just increasing the number of shares only goes part of the way in showing this effect, since many options are very valuable. Thus, companies with a significant number of outstanding options are also required to calculate the fair value of these options, subtract this value from net income, and calculate earnings using this figure. They don't have to show this lower earnings per share figure on the income statement proper, but it can usually be found in the notes.

 

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