In the drama that is the Financial Statements of a Company, the financial information can be broken down into three scillintillating acts. Act One is the Income statement. It contains what you would expect. I have liberated an example from Morningstar of what VXGN‘s income statement looks like.

I have made it big so you don’t have to strain your eyes if you working on this late at night, like I do.

First the name of the company VaxGen, Inc. followed by the stock ticker abbreviation VXGN.

If you look at the Income statement below your likely reaction is Wow, that’s a lot of numbers and abbreviations. Don’t worry it will all become clear. Eventually.You may  need to review some of these items a couple of times. Or you will send me a better translation of the financial argot than I have listed. If you do, I will update the post.

Line 1 Revenue. This should be clear. This the revenue that a company had for that fiscal year.

Line 2 COGS – Cost of goods and Services. This is not brain surgery. It should be clear, up to now.

Line 3 Gross Profit- This line is the difference takes the Revenue and subtracts the cost of goods and services

VXGN Income statement as supplied by Morningstar

Line 4 SG&A is the first line under a category called Operating expenses. No this is not a disease of the week. It stands for Selling, General and Administrative Expenses

Line 5 R&D. You might guess this one on your own. Research and development.

Line 6 Other. No sarcasm on this one. Although it probably derserves it. Other Operating expenses that are not SG&A or R&D.

Line 7 Operating Income. This is weird. You add up all the operating expenses and subtract it from Gross profit. It can also be called Operating Profit.

Next we move into the Other Income and Expense section. I’m going to let you guess this one on your own.

Line 8 Net Int Inc & Other. Net Interest Income and Other financial related income

Line 9 Earnings before taxes. Obvious definiton but obscure in meaning. Add Net Int Inc to Operating Income and you have Earnings before taxes.

Line 10 Income Taxes. They suck and we all know it.

Line 11 Earnings after Taxes. Accountants get paid good money to deal with stuff like this. Its not really that hard. I think you get the idea of this one too.

Line 12 Acctg Changes. Accounting Changes. This involves changes to the way the company is accounting for money. It’s funny that when you look at the numbers in a slightly different way it changes the value of something.

Line 13 Disc. Operations- accounts for discontinued operations of that company. Closing down a division of a company or getting rid of that pesky cousin.

Line 14 Ext Items.Exceptional Items. These are charges that must be disclosed by GAPP accounting rules.

Line 15 Net Income. This is one of the big numbers. A lot of financial people pay an inordinate amount of attention to this number. Net Income means the what is left over after paying all the bills. There is an enormous amount of conversation about whether this is number is useful since it can be manipulated by accountants. So can almost any number. This is the number, understandably, that analysts focus on because it is what is used to determine Earnings per share, which in turn is used to determine the magic number of Price to Earnings ratio (P/E)

The numbers in a financial statement will be accurate if the management of that company insist on accuracy and openess with their shareholders. This is often not the case. Although we have defined the elements that make up the Income Statement it doesn’t really explain how to use the numbers productively.

Next we turn to the Cash Flows. Tomorrow’s post.

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