Financial Statements

Companies communicate what their assets, liabilities, expenses, and revenues are in four different financial statements:

- The balance sheet shows at a particular point in time what a company owns (its assets) and what it owes (its liabilities).

- The income statement shows how successfully the business performed during a period of time by reporting its revenues and expenses.

- The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

- The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

For a real world example of a company’s financial statements we’ll use ABM Industries, Inc. (ABM), a buildings maintenance and services company I picked for Financial Samurai’s Samurai Fund.  The Samurai Fund is a virtual hedge fund with companies selected by Samurai’s readers based on a permutation of their online names (hence the ABM for me).  We’ll use ABM’s financials as reported at finance.yahoo.com, although the same information can be found in a number of other places like ABM’s website, at the SEC’s website, at moneycentral.msn.com, etc.

Income Statement

The income statement lists ABM’s revenues followed by its expenses and the net income (or net loss) is determined by deducting expenses from revenues.  Investors are interested in a company’s past net income because it provides some information about future net income.

Any money received from issuing stock or paid out as dividends are not used in determining net income.  Amounts received from or paid to shareholders are not revenues or expenses.

For the period ending 31 October 2009 ABM had Total Revenues of $868,005 and a Cost of Revenue of $778,834 (values are in millions of dollars).

To determine the Gross Profit the Cost of Revenue is subtracted from the Total Revenues:

Total Revenue:                 $868,005
Cost of Revenue:             $778,834
Gross Profit:                       $89,171

Operating Expenses are subtracted from the Gross Profit to get the Operating Income:

Selling General and Administrative:        $63,245
Non Recurring:                                          $1,566
Others:                                                     $2,929
Operating Income or Loss:                      $22,997

Interest Expense and Income Tax Expense are subtracted from the Operating Income to give a Net Income From Continuing Operations of $15,286 and then a debit for Discontinued Operations of -$263 is added in to give a Net Income of $15,023,000.

Comparing Net Income from this quarter to previous quarters we can see net income has been increasing, which is a good sign.  If you’re interested in learning exactly what the expenses are you can look them up in ABM’s quarterly filing in the full income statement which can be found here, but this gives you a general idea of how an income statement works.  The important thing to remember is the income statement gives you a company’s net income which is its revenues less its expenses.

In the next article we’ll cover the other three financial statements. 

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