Financial Resources

Following this lesson, students should be able to 1) define, 2) read, and 3) analyze the income statement of a publicly traded company.

Investors must think about many things when choosing where to invest their money. Investors cannot think about just one investment, but rather their larger portfolio. Moreover, within this portfolio, investors must think about issues of diversity and risk management. Finally, when adding to a portfolio, investors must be able to analyze specific companies. This means thinking about the company in context (i.e. SWOT analysis), but also looking closely at the company itself. Financial documents provide data on the inner-workings of publicly traded companies. All publicly traded companies must submit SEC filings providing financial documents. These filings (known as 10-K and 10-Q) contain three very important types of financial statements (income statement, balance sheet, cash flow statement) and each serves a different purpose.

Today we will be looking specifically at the income statement. Using the 10-K filings from Apple Incorporated.  You will look at the income statement. In this filing, the income statement is under the heading “Statement of Operations,” on page 43.

Apple Incorporated 10-K Fillings Download Apple Incorporated 10-K Fillings

NOTE: The 10-K and 10-Q filings are very long documents that contain large amounts of information. For this and all other lessons, students only need to focus on the three financial documents (income statement, statement of cash flow and balance sheet). In the Apple filing, these span ONLY pages 43-46. If you plan to print these documents out for class, print only pages 43-46.

After you have read through the income statement, view the definitions for each of the items on the sheet. Net sales refers to all of the money made from selling products and services. Ask students what this means for a company like Apple. Cost of sales refers to the cost of the goods being sold — this includes raw materials, labor and overhead. Gross Margin equals Net Sales minus Cost of Sales.

Operating expenses refer to all other costs of operating, not associated with cost of sales. This includes Research and Development costs, as well as selling, general and administrative expenses. Research and Development costs are the costs of researching and building new products. Selling, General, and Administrative Expenses (SG&E) refers to the cost of operating the company day-to-day, costs beyond the cost of goods produced. In the Apple filings, this is referred to as “Operating Costs.”

Income refers to revenue minus cost. Income is the difference between money taken in (by selling goods and services) and money spent (on producing those goods and running the company). Have students calculate the Gross Income of Apple Inc. by subtracting cost of sales and SG&E from the net sales. This gross income is different than net income. Net Income is equal to gross income minus taxes and dividends.

Earnings per share is a measure of total profit divided by (average) total number of shares held. In other words, how much of the total profit is associated with each share of stock.