The Finance Professor: How to Read an Income Statement

Provision for Income Taxes

Under GAAP, a company must make a calculation or provision of the amount of income taxes owed based upon the company's GAAP results. This amount may differ from the actual taxes paid to federal and local governments. For the purposes of the income statement, the provision is presented. In terms of cash flow and balance sheet statements, taxes owed or paid are factored in relative to the provision. (The cash flow and balance sheet statements will be covered in the upcoming weeks.)

The Bottom Lines: Net Income and EPS

When we subtract taxes from EBIT we arrive at net income. If we divide net income by the total diluted outstanding share count of the company, we get earnings per share (EPS).

Other Wrinkles and Their Impact on EPS

There are two additional financial wrinkles that we need to consider when looking at EPS: discontinued operations and nonrecurring items.

Discontinued Operations: From time to time, a company will sell or spin off a business or close down a subsidiary. When this occurs, the company will segregate the net income attributed to these divisions or products as income or as a loss from discontinued operations.

The impact to EPS for discontinued operations is separated from net income to arrive at net income from continuing operations.

Nonrecurring Items: On occasion, one-time nonrecurring items, which benefit or negatively impact the company's results, are incurred. These items are typically highlighted and separated because they do not represent an aspect of continuing operations of the company.