Analyzing Income Statements

How revenue and expenses are recognised (the five-step revenue model, principal versus agent, long-term contracts, capitalising versus expensing), how non-recurring items, discontinued operations and accounting changes are reported, how basic and diluted EPS are calculated, and how common-size income statements and margins reveal a company's performance.

1. 1. Revenue recognition: core principle and the five-step modelRevenue is recognised when control of a promised good or service passes to the customer, in the amount the seller expects to be entitled to, which need not coincide with when cash arrives.Free13 min
2. 2. Revenue recognition in practice and what it means for analysisThe same economic activity can produce very different revenue and margins depending on whether the seller is a principal or an agent, whether control passes at a point in time or over time, and how progress is measured.Video · 7 min14 min
3. 3. Expense recognition and capitalising versus expensingExpenses follow the consumption of economic benefits: matched with revenue, charged to the period, or capitalised and spread over an asset's life, and that choice reshapes profit, cash flow classification and trends.14 min
4. 4. Capitalised interest and capitalised development costsInterest and development costs can sit on the balance sheet instead of the income statement, so analysts add them back to get true interest coverage and comparable profit, cash flow and valuation multiples.Video · 6 min12 min
5. 5. Non-recurring items, discontinued operations and accounting changesTo forecast earnings, separate what will recur from what will not: discontinued operations are shown net of tax below continuing operations, unusual items stay inside continuing operations, and accounting changes are restated backward or applied forward depending on their type.Video · 6 min13 min
6. 6. Basic EPS and the weighted average number of sharesBasic EPS divides the earnings that belong to ordinary shareholders by the time-weighted number of ordinary shares outstanding during the period.Video · 6 min11 min
7. 7. Diluted EPS: if-converted, treasury stock and antidilutionDiluted EPS shows what EPS would be if every dilutive security had become ordinary shares, adjusting both earnings and share count, and leaving out any security that would raise EPS.Video · 6 min15 min
8. 8. Common-size income statements and margin analysisExpressing every income statement line as a percentage of revenue removes the effect of size, so margins can be compared over time and across companies, and differences point to strategy and cost structure.12 min
9. 9. Integrated cases: capitalising, restated results and gross versus net revenueThree accounting choices change reported profit and ratios without changing the business: capitalising a cost, restating results for a new policy, and presenting revenue gross or net; the analyst's job is to put the numbers on a common basis and say what each choice flatters.16 min