Income Statement AnalysisThis weeks DQ focuses on the Income Statement.?It builds on the insights we gained in Week 2, but go

• Income Statement AnalysisThis week’s DQ focuses on the Income Statement. It builds on the insights we gained in Week 2, but goes a little deeper in our use of financial statement analysis skills.
  1. Locate and post a screen shot of an actual Income Statement from the latest fiscal year for one of the following companies:
     • Sears (Note: use this link Sears Holding Corp 10-K)
     • Tesla
  2. Pick an Income Statement Line Item or Ratio from the list below:
  3. Line ItemRatio 
  • Revenue (aka Sales, Turnover)
  • Cost of Goods Sold/Cost of Sales
  • Salary Expense
  • Selling, General and Administrative Expense
  • Gross Profit
  • Operating Profit
  • Net Profit
  • Gross Margin (%)
  • Net Margin (%)
  • Salary Expense as % of Sales
  • Return on Sales
  • Return on Equity
  • Return on Assets
  • Earnings Per Share (EPS)
  • EBITDA
  1. What does this line item or ratio measure and why is it important item for Management to understand this number?
  2. Identify the past 4 years of amounts for your line item or ratio (Note: this will require you to track down additional historical Income Statements to get the older data). Share this data with the class using a data table or chart.
  3. Answer the following questions:
     • What is the trend for this line item or ratio?
     • Has the line item or ratio amount increased or decreased?
     • Is this a “good” thing or a “bad” thing? For this company?
     • What might management do to improve this line item or ratio?
  4. Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates' initial posts by Sunday, midnight of your time zone.
• Example from the Professor

Below is a Sample Post from a previous 530 Instructor. 

Sample Post from Professor Brooks

This week I'd like to discuss "Earnings From Discontinued Operations, which is a line item in Procter & Gamble's income statement.

Definition

This line item summarizes the profit (revenue less expenses) related to “segments of a company’s business that have been sold, disposed of, abandoned, or being held for sale.  Discontinued operations can range from a certain product line to an entire line of business (but would not include small divestiture of a single product that is not material to the business).” (1)  GAAP distinguishes income from ‘continuing operations’ and ‘discontinued operations’ in order to communicate to investors that the company has disposed-of assets that generated a particular amount of profit and that only income from continuing operations should be expected to be earned next year.  (2)  Simply put, it is a line item intended to show what amount of profit will likely NOT be earned in subsequent years. 

Is an increase in this account “good” or “bad? 

Well, it depends.  Generally, it is concerning when companies have discontinued operations.  It reflects that a business has become redundant, or non-core, or under-performing and thus will be sold/disposed of.  It means that the company will no longer earn profit on this business for the long-term.  However, companies put a positive spin on this line and highlight that they are “focusing on the core” and “divesting under-performing businesses” and “restructuring to save money”. Frankly, both perceptions are true and it is often healthier in the long-term to recognize when a business no longer fits with a company.

Historial Results:

The following are historical reported Earnings from Discontinued Operations for P&G:

            2011       $229 M

            2012    $1,754 M

            2013       $101 M

            2014         $78 M

Analysis

As I look at the data, it appears that P&G's Earnings from Discontinued Operations is in steady decline since 2011 and that 2014 is the lowest level in 4 years, which is generally a good thing because Earnings in this line item eventually terminate as businesses are eventually divested or disposed of.  I also observed an unusally high level of Earnings from Discontinued Operations in 2012 which bears further investigation.   

Root Cause/Conclusion:

It appears that P&G has had an intentional and sizeable effort to pare its portfolio and refocus the company.  The Notes to the financial statement indicate that the current $78 M earnings are primarily related to their announced exit from Pet Care via a sale of the business to Mars, Inc as well as some expenses related to their ongoing Restructuring program.  I investigated the unusually high 2012 results and discovered that they are related to the one-time sale proceeds of their divestiture of the Snacks business.

Fortunately, it appears that they are nearing the end of that effort and that investors should expect less Earnings from Discontinued Operations.  I Googled “P&G Restructuring” and uncovered that they just announced the divestiture of some beauty brands, but their CEO has declared that “P&G has completed substantially all of its planned restructure and will focus on the 10 remaining categories where they can grow and create value.”  Net, I would expect that this line item reduce further after the Beauty divestiture is completed.

Article on their announced restructuring plan from 2014:  http://www.wcpo.com/money/local-business-news/procter-gamble-co-pg-plans-major-restructuring-of-its-brand-portfolio

Article on their recent announcement that the restructuring is substantially complete: http://www.perfectpearlsolutions.co.uk/pg-nears-end-of-brand-cull-after-beauty-deal-with-coty/

Jeff Brooks

References

(1)  http://www.investopedia.com/terms/d/discontinued-operations.asp

(2)  http://accountingexplained.com/financial/statements/discontinued-operations-income

(3)   Procter & Gamble 2014 Annual Report, Procter & Gamble 2012 Annual Report available at http://www.pginvestor.com/GenPage.aspx?IID=4004124&GKP=1073748359

(4)  http://www.wcpo.com/money/local-business-news/procter-gamble-co-pg-plans-major-restructuring-of-its-brand-portfolio

(5)  http://www.perfectpearlsolutions.co.uk/pg-nears-end-of-brand-cull-after-beauty-deal-with-coty/

From <https://blackboard.strayer.edu/webapps/discussionboard/do/message?action=list_messages&forum_id=_2283665_1&nav=discussion_board&conf_id=_158281_1&course_id=_179202_1&message_id=_51715387_1#msg__51715387_1Id

1st person to respond to is Phi

Hello Professor/Classmates,

Locate and post a screen shot of an actual Income Statement from the latest fiscal year for one of the following companies: Tesla

 Tesla Annual Report/Income Statement (1)

Pick an Income Statement Line Item or Ratio from the list below: 

This week I will be looking at Gross Profit. 

What does this line-item measure and why is it important item for Management to understand this number?

Hays describes it as “the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services” (2). The formula used is Gross Profit = Revenue−Cost of Goods Sold (2). COVID-19, a global semiconductor shortage and port congestion aside, Management needs to understand and, more importantly, control over the variable cost (2). As Tesla expands its footprint, materials, utilities for the production site and shipping costs can spiral out of control. Quality control and efficiency are essential for output (2).    

Identify the past 4 years of amounts for your line item or ratio (Note: this will require you to track down additional historical Income Statements to get the older data). Share this data with the class using a data table or chart.

TESLAUNITS ( Millions)Millions     FY 2020FY 2019FY 2018FY 2017CommentsTotal Revenue (or Sales)  31,536  24,578  21,461  11,759 Cost of Goods Sold/Cost of Sales  24,906  20,509  17,419    9,536 Gross Profit (Gross Income)    6,630    4,069    4,042    2,223Rev – COS

What is the trend for this line item or ratio?

The trend is heading in a positive direction. 

Has the line item or ratio amount increased or decreased?

Since 2017 Tesla’s Gross Profits have increased to the tune of $2Billion, except for 2018 and 2019, where the numbers remain about the same. 

Is this a “good” thing or a “bad” thing? For this company?

I see it as a good thing for the company. The following chart from Trading Economics (3) indicated two areas that gave me confidence in supporting the narrative; 1) Eoy 2018 ($1.44B) Eoy 2019 ($1.39B) and Eoy 2020 ($2.07B) during the height of Covid-19. 

What might Management do to improve this line item or ratio?

I believe Management has done very well in what they did, especially with the COVID-19, the global semiconductor shortage, and port congestion. I am sure continuous oversight of variable cost items management can improve this area.  

Phil

References

1. Tesla Annual Report. 2021. Income Statement. Retrieved from: https://www.sec.gov/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm 

2. Hays, A. (2021). Gross Profit. Investopedia. Retrieved from: https://www.investopedia.com/terms/g/grossprofit.asp  

3. Trading Economic (n.d.). Tesla. Gross Profit. Retrieved from: https://tradingeconomics.com/tsla:us:gross-profit-on-sales 

2nd person to respond to Gabriela

Greetings Prof. Armstrong & Classmates,

TESLA

 

The Cost of Goods Sold/Cost of Sales is the cost of doing business and includes all the costs directly related to acquiring and manufacturing the products that a company sells during a period, but only for those, customers purchased during the year (Investopedia, 1). These manufacturing costs include the cost of labor (only direct one, associated to production), materials, manufacturing overhead, depreciation/amortization, and the commissions paid to the sales team (Siciliano, 2). The COGS do not include business expenditures, called expenses, like those related to developing, selling, and running the general and administrative side of the business (Ittelson, 3). The value of the cost of goods sold depends on the inventory costing method adopted by a company: First In, First Out (FIFO), Last In, First Out (LIFO), and the Average Cost Method. Because the value of the COGS affects the company’s gross profit, there is pressure on choosing the accounting method that will produce a lower COGS figure to boost the company profitability (Investopedia, 1).

Although by comparing the last five years, 2018 was the best year Tesla had in terms of revenue, and cost of revenue, followed by a big drop in 2019, the trend since then is on an upward curve. The COGS figure from the Income Statement for Q3 2021 versus Q3 2020 has recorded an increase of 50.52% for an increase of revenues of 56.85% for the same period. Therefore, much lower costs for higher sales. The higher sales were achieved by lowering the ASP of cars from 90,000 in 2018 to a decrease of 6% YOY, so the lower ASP vehicles became a larger percentage of Tesla mix (Tesla, 4). The increased number of deliveries, the lower ASP of cars, and the cost reduction positively impacted the company profits. The company declared in Q2 2019 their intentions to continue to make progress in reducing the cost of the product, including through volume growth (fixed cost absorption), lowering material cost, reduction of labor hours per vehicle, and reduction of logistics costs (Tesla, 4). The Shanghai factory, where the production has carried well since its opening in 2020, is a site where the labor cost, a main component in the COGS is significant much lower than for the US factory in California.

Cost of Revenue (CR)

Revenues  (R)

Rate CR

Rate R

Q3 2021

10,097

13757

–

–

Q3 2020

6,708

8771

50.52%

56.85%

Q3 2019

5,112

6,303

31.22%

39.16%

Q3 2018

11,636

14,235

-56.07%

-55.72%

Q3 2017

6,686

8,470

74.04%

68.06%

The surge in the net income for Q3 2021 had a significant impact on the ROA, which shows how investments are converted into profits, so for each dollar invested in assets it generated 2.8 cents of net income.

Q3 2021

Q3 2020

Net Income

1,618

331

Total Assets

57,834

45,691

ROA

2.80%

0.72%

Thank you. Gabriela

References:

1. Investopedia. Retrieved from: https://www.investopedia.com/terms/c/cogs.asp
2. Gene Siciliano. 2015. Finance for Nonfinancial Managers.
3. Thomas R. Ittelson. 2020. Financial Statements.
4. Tesla. Retrieved from: Tesla Releases Third Quarter 2021 Financial Results | Tesla Investor Relations