How_Money_Works_-_The_Facts_Visually_Explained

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PROFIT-MAKING AND FINANCIAL INSTITUTIONS

Corporate accounting

INFLATING EARNINGS

Some companies omit certain expenses

from their calculations to make net income

appear higher, while others inflate earnings

to make profits appear higher, for example

by including projected future earnings. This

is at best unethical, and potentially illegal.

In 2014, British grocery chain Tesco

launched an investigation after discovering

its first-half earnings estimate had been

inflated by around $407 million due to

alleged accounting errors. So, while net

income is an important indicator of a

company’s financial health, it should not be

used as the only means of assessment.

Rent

Staff

Stock purchased

Tax

Net Income

$10,000

$30,000

$22,000

$20,000

$18,000

COSTS

Bottom

line

Expenses

COSTS

RETAILER

❯❯Bottom line Refers to the

bottom of the income statement,

and is another expression for

net income.

❯❯Earnings per share Net income

divided by the number of shares

in issue; it is seen as an indicator

of a company’s profitability.

❯❯Expenses The costs incurred

in running a business that have

to be settled immediately, rather

than paid off gradually over a

number of years.

❯❯Depreciation of assets The

decline in value of assets that

the company has bought; this

may be a plant for manufacturing

processes, or specialty machinery.

❯❯Banking and interest charges

The cost of finance, including

loans, debts, mortgages, and

other amounts owing.

NEED TO KNOW

TOTAL REVENUE $100,000

$18 .4

billion

Apple’s first quarter

net income in 2016 −

the highest quarterly

profits in history

US_028-029_Net_Income.indd 29 13/10/2016 16:15