Reliably measured companies capitalize intangible

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reliably measured. Companies capitalize intangible assets only when those Ql assets are purchased, and not ~ $200 when they are internally devel- ~ Ql oped. Consequently, Apple's bal- ! ance sheet and the balance sheets $100 of many knowledge-based com- panies are, arguably, less informa- tive about company value. $300 BookValue MarketValue r / / / / / $0 2006 i 2007 r 2008 r 2009 r 2010 i The income statement reports revenues earned during a period, the expenses incurred to pro- duce those revenues, and the resulting net income or loss. Apple's income statement from its 2010 lO-K is shown in Exhibit 2.5. Apple reports net income of $14,013 million on sales of $65,225 million. This means that about $0.21 of each dollar of sales is brought down to the bottom line, computed as $14,013 million divided by $65,225 million. Apple's net income margin is higher than that of the average publicly-traded company, which reports about $0.06 in profit for each sales dollar. The remaining $0.79 of each sales dollar for Apple (computed as $1 minus $0.21) is consumed by costs incurred to generate sales. These costs include produc- tion costs (cost of sales), wages, advertising, research and development, equipment costs (such as depreciation), and taxes. INTERPRETING AN INCOME STATEMENT "- --~-- ---- - - : EXHIBIT 2.5 Apple's Income Statement ($ millions) APPLE INC. Income Statement For Year Ended September 25,2010 $65,225 39,541 25,684 1,782 5,517 7,299 18,385 Net sales . . . . .. .. . . .. .•. . . . .. . ... .. . . . .. .. . . Cost of sales . . .. . '.' . , . Gross margin ; .. , . Operating expenses Researchand development . Selling, general, and administrative . Total operating expenses '..• .......... Operating profit , , .. Other revenue and expense Interest and other income, net , . Income before provision for income taxes . Provision for income taxes . Net income . 155 18,540 4,527 $14,013
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Module 2 I Overview of Business Activities and Financial Statements 2-12 To analyze an income statement we must understand some terminology. Revenues (Sales) are increases in net assets (assets less liabilities) as a result of ordinary operating activities. Expenses are decreases in net assets used to generate revenues, including costs of sales, operat- ing costs like wages and advertising (usually titled selling, general, and administrative expenses or SG&A), and nonoperating costs like interest on debt. The difference between revenues and expenses is net income when revenues exceed expenses, or net loss when expenses exceed revenues. The terms income, profit, and earnings are used interchangeably (as are revenues and sales). Operating expenses are the usual and customary costs that a company incurs to support its operating activities. Those include cost of goods sold, selling expenses, depreciation expense, and research and development expense. Not all of these expenses require a cash outlay; for example, depreciation expense is a noncash expense, as are many liabilities such as wages payable, that recognize the expense in advance of cash payment. Nonoperating expenses relate to the com- pany's financing and investing activities, and include interest expense, interest or dividend income, and gains and losses from the sale of securities. Business decision makers and analysts
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