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The Finance Professor: How to Read an Income Statement

05/21/07 - 04:04 PM EDT

Scott Rothbort

Section by Section

Let's first start in the top section of this income statement, with revenue revenue (or income). Please note that within revenue you have two different classifications: sales (e.g., "Sales by Company --operated restaurants") and revenue (e.g., "Revenues from franchised and affiliated restaurants.") While sales and revenue might seem like identical terms and are frequently used interchangeably, there are some subtle differences to be aware of.

Sales vs. Revenue

Some companies act as direct sellers to the public and, concurrently, as suppliers to wholesalers or other distributors. Other companies use franchisees to distribute their product. Sales represent direct sales to the public or distributors. In McDonald's case, these are sales that McDonald's makes at company-owned restaurants. Revenue represents income streams from nondirect or ancillary sources. For McDonald's, this would be fees earned from franchisees that operate their own McDonald's branded restaurants.

For another take on the difference between sales and revenue, let's take a quick look at BJ's Wholesale Club BJ. BJ's direct sales to customers would be viewed as sales, while the fees it earns from its members' annual membership dues would be viewed as a revenue item.

At the time of publication, Rothbort was long BJ, C, CVS, MCD, and MER (with calls), although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


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The Finance Professor

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