Ch $03-$Video Lesson $-$ Financial Statements, Cash Flow, and Taxes

uperating income $($tBII$)$

Less interest

Earnings before taxes $($EBT$)$

Taxes $(25\mathrm{.}00\%)$

Net income

$$240,$$$105$

Total dividends

$$75$

$$70$

Addition to retained earnings

$$165$

$$35$

Most financial analysts will pay close attention to operating income $($EBIT$),$ which is calculated as sales revenues minus operating costs, that is derived from regular core business operations.

Note that although operating income and net income both increased in this example, this need not always be the case. If debt, or interest on debt, increases significantly then this can cause a decrease in net income even if operating income rises.

Further recall that depreciation $($the estimated dollar cost of capital and tangible assets used during production$)$ and amortization $($the estimated decline of intangible assets$)$ are both noncash chargers against income and are typically grouped together on the income statement. Because these are noncash charges, many analysts will look at earnings before interest, tax, depreciation, and amortization $($EBITDA$)$ when analyzing the amount of cash generated by a company.

One way in which the income statement differs from the balance sheet is the time period. The balance sheet captures assets and liabilities of a company at a single moment in time, while the income statement shows data aggregated over an extended time period, such as month, quarter, or year. However, the balance sheet and the income statement are related in that the net income that is not paid out as dividends $($calculated on the income statement$)$ is added to the cumulative retained earnings for a company, which is shown on the balance sheet.

True or False: Depreciation and amortization are both noncash charges against income. $$

True

False