Page 82 - Finance for Non-Financial Managers

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The Income Statement: The Flow of Progress
Pretax Income and Provision for Income
Taxes Are Usually Wrong!
Oh, OK, not wrong because they were calculated incor- 63
rectly, but because they’re rarely the actual amounts reported on the
company’s tax returns.They’re estimates, and often not even based on
the tax returns actually filed, but on a complex calculation that blends
GAAP and the tax laws. So take these numbers with a grain of salt and
don’t expect to see them on the company’s tax returns. No matter,
though, because the difference isn’t usually controllable, and the num-
ber you really want is the last one, net income.
which its income tax estimate is based. Immediately following
that is the income tax estimate, usually called provision for
income taxes or something like that.
The number that matters most comes last, net income. This
is the real bottom line. It’s the final financial result of everything
the company has done for the period being reported, after all
the reasons, the excuses, the bragging, and the complaining.
This is it—the final act, the last number you’ll every see. Well,
almost.

Earnings per Share, Before and After Dilution—What?

For a privately owned company and its principals, nothing mat-
ters after Net Income. But if your company is publicly traded
and the financial statement is one of the quarterly or annual
reports that are issued to the media, what seems to matter
more than net income is a little thing called net income per
share of stock owned by stockholders, better known as earnings
per share (EPS).
In this little calculation, net income is divided by the num-
ber of shares held by all the owners. The result is the amount
of that net income (or loss) that is allocable to each share of
stock. This is a powerful number in the hands of a media rep-
resentative, an investment advisor, or an investment banker
touting an upcoming stock offering. Why so much attention?
It’s the easiest way an individual who owns 100 shares of