PArT 1: INTrODuCTIONtaxes (EBIT) of $1,671 million. When a company
has no ‘other income’, its operating profit and
EBIT are equal. Next, the company subtracts
interest expense – representing the cost of debt
financing – from EBIT to find pre-tax income. For
example, GPC subtracts $123 million of interest
expense from EBIT to find pre-tax income of
$1,548 million.
The final step is to subtract taxes from pre-tax
income to arrive at net income, or net profits after
taxes ($949 million for GPC). Net income is the
proverbial bottom line: the single most important
accounting number for both corporate managers
and external financial analysts. Note that GPC
incurred a total tax liability of $599 million during
2016, but only the $367 million current portion
must be paid immediately. The remaining $232
million in deferred taxes must be paid eventually,
but these are non-cash expenses for year 2015.
From its net income, GPC paid $3 million in
dividends on its $30 million of preferred shares
outstanding during both 2015 and 2016. Net
income net of preferred share dividends is earnings
available for ordinary shareholders. Dividing earnings
available for ordinary shareholders by the number
of shares of ordinary shares outstanding results
in earnings per share (EPS). Earnings per share
represents the amount earned during the period
on each outstanding share of ordinary shares.
Because there are 178,719,400 shares of GPC
shares outstanding on 30 June 2016, its EPS for
2016 is $5.29, which represents a significant
increase from the 2015 EPS of $2.52. The cash
dividend per share (DPS) paid to GPC’s ordinary
shareholders during 2016 is $1.93, up slightly
from the 2015 DPS of $1.76.2-1c STATEMENT OF rETAINED EArNINGS
The statement of retained earnings is a shortened form of the statement of shareholders’ equity that reconciles
the net income earned during a given year, and any cash dividends paid, with the change in retained earnings
between the start and end of that year. Table 2.3 presents this statement for GPC for the year ended 30
June 2016. It shows that the company began the year with $3,670 million in retained earnings, and had
net income after taxes of $949 million. From its net income, GPC paid a total of $348 million in preferred
and ordinary shares dividends. At year-end, retained earnings were $4,271 million. Thus, in 2016, the net
increase for GPC was $601 million ($949 million net income minus $348 million in dividends).earnings available for
ordinary shareholders
Net income net of preferred
share dividends
earnings per share (EPS)
Earnings available for ordinary
shareholders divided by the
number of ordinary shares
outstanding
dividend per share (DPS)
The portion of the earnings per
share paid to shareholders
TABLE 2.2 INCOME STATEMENT FOR GLOBAL
PETROLEUM CORPORATION
Global Petroleum Corporation income statements for the
years ended 30 June 2015 and 2016 ($ in millions)2016 2015
Sales revenue $12,843 $ 9,110
Less: Cost of goods solda 8,519 5,633
Gross profit $ 4,324 $ 3,477
Less: Operating and other expenses 1,544 1,521
Less: Selling, general and administrative
expenses616 584
Less: Depreciation expense 633 608
Operating profit $ 1,531 $ 764
Plus: Other income 140 82
Earnings before interest and taxes (EBIT ) $ 1,671 $ 846
Less: Interest expense 123 112
Pretax income $ 1,548 $ 734
Less: Taxes
Current 367 158
Deferred 232 105
Total taxes 599 263
Net income (net profits after taxes) $ 949 $ 471
Less: Preferred share dividends 3 3
Earnings available for ordinary
shareholders$ 946 $ 468
Less: Dividends 345 326
To retained earnings $ 601 $ 142
Per share datab
Earnings per share (EPS) $ 5.29 $ 2.52
Dividends per share (DPS) $ 1.93 $ 1.76
Price per share $ 76.25 $71.50
a Annual purchases have historically represented about 80% of cost of
goods sold. Using this relationship, its credit purchases in 2016 were
$6,815 and in 2015, they were $4,506.
b Based on 178,719,400 and 185,433,100 shares outstanding as of 30
June 2016 and 2015, respectively.