tailed breakdown made for the operating management is usually not pre-
sented in the annual report to the general stockholders. Furthermore, the
format and the order of items on the report differ according to the tastes
and traditions of the managements of different firms.
Financial services gather data on corporations for the investment com-
munity. The financial services use a similar format for all firms to make it
easy to compare companies. The form used by the services breaks out most
of the important variables that are interesting for investment analysis. For
example, a company’s annual report will often lose the depreciation
charges in a lumped account such as “manufacturing costs” or “cost of
goods sold,” and the actual depreciation charges can be obtained only in a
footnote or in an obscure part of the report. The financial services show
the depreciation charges as a separate item.
Table 2.3 is the AOL Personal Finance (Thomson) income statement
for Johnson & Johnson during the 1999–2003 period. The income state-
ment is highly useful for various financial analyses, because its bottom line
is the net income of the firm. The firm produces goods and services, and
markets and sells its goods and services, generating sales and producing net
income. Net income may well be negative.
The sales account shows the total gross revenue received by the firm
during the period. It includes sales for cash and for credit, whether or not
they were collected at the end of the period. The sales figure should be net
of allowances made to the buyers for spoiled or poor-quality goods or re-
turned shipments.
The direct operating costs are the amounts spent for material and la-
bor on the goods sold; costs of goods sold; and depreciation, depletion,
and amortization expenses. Net sales minus cost of goods sold and the de-
preciation, depletion, and amortization expenses yield the gross income of
the firm. One subtracts selling, general, and administrative (SG&A) ex-
penses, other operating expenses (including research and development ex-
penses), and extraordinary charges to determine earnings before interest
and taxes (EBIT).
The nonoperating income account includes interest income, divi-
dends on investments, and similar items. Income from major subsidiaries
should be consolidated on the reported income statement, even if this is
not done for tax purposes. Thus this account does not include the divi-
dends from dominated subsidiary companies. Irregular income, such as
that which might occur from the sale of an operating asset at a profit,
are presented near the foot of the statement after the results of regular
operations are reported.
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) represent the gross return on the company’s operation. It is the
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