[MUSIC] Last time, we started looking at the different components of the income statement. We covered items like EBITDA and EBIT. In this video, we will complete the remaining items on the income statement and also define a few other profit measures that we will typically observe on an income statement. We will also cover how the income statement and balance sheet are linked. We calculated Amazon's EBITDA to be $8.48 billion at the end of 2015 and it's EBIT to be $2.24 billion. The next step is to adjust for any interest income and expenses. Remember, at the top of the income statement only revenues from operations are reported. But a company earns an income from investing some of their capitol in short to medium term investments that pay in interest periodically. This is recorded as interest income and is added to the company's EBIT. For Amazon, interest income in 2015 was $0.05 billion. Similarly, a company pays interest on moneys borrowed from various sources. This is deducted from EBIT. Amazon had an interest expense of $0.46 billion in 2015. It also incurred other non-operating expenses of $0.26 billion in 2015. Adding the interest income of 0.05 billion to and subtracting the interest expense of 0.46 billion and other non-operating expenses of 0.26 billion from the EBIT of $2.24 billion, gives us Amazon's earnings before tax, referred to as EBT, to be $1.57 billion. Another expense on the income statement are those that are unusual or infrequent. Until recently they were recognized as extraordinary items on the income statement. After a recent rule change, they do not have to be recognized separately as extraordinary items, but still have to be reported as revenue or expense as the case may be on the income statement. An example of an extraordinary event is loss of inventory because of a fire in the warehouse. This would be reported as losses due to the fire in the warehouse on the income statement. In 2015, Amazon did not have any such extraordinary items. The last part of the income statement is corporate taxes that the company must pay. This depends on what the tax rate for the company is. Total tax obligations for Amazon in 2015 was $0.95 billion. After subtracting these taxes and net equity return of investment activity of $0.02 billion, Amazon's net income or earnings after tax or profit after tax was $0.60 billion. The net income is also referred to as the bottom line as it is the last line in the income statement. It represents the profits, net of all expenses incurred during the year. The net income represents the total profits of the company. The income statement usually also reports an earnings per share referred to as EPS. The EPS tells us how much profit the company has made for every share in the company. There are two types of EPS usually reported on an income statement, basic and diluted EPS. Basic EPS is based on the number of shares the company has actually sold. Amazon's income statement states that it uses 467 million shares outstanding to compute the basic EPS. Dividing the net income of $0.60 billion by the 467 million shares outstanding gives us a basic EPS of $1.28 per share. A company makes a number of stock awards, for example a company includes employee stock options as part of its employee's compensation. These allow employees to buy the company's shares at a later date. Diluted EPS is computed as if the impact of such purchases by employees is included in the number of shares outstanding. Amazon's income statement reports that the number of shares outstanding used to compute a diluted EPS is $477 million. This means that Amazon has stock awards for 10 million shares that are yet to be converted to stock. Dividing the net income of $0.60 billion by 477 million shares yields a diluted EPS of $1.25 per share. An investor would prefer that the difference between basic and diluted EPS not be very large. If the difference is very large it signifies that there may be a potentially large dilution in ownership stake in the future. A smaller difference signifies that the dilution and ownership stake may not be very large. Lastly, we look at how a company's net income is reported on the balance sheet. Common shareholders are the owners of the company, but are also the last claimants to a company's profits. They're referred to as a residual claimants. The EPS represents what shareholders could potentially get. In Amazon's case, the basic EPS of $1.28 per share says that each shareholder is eligible to earn $1.28 for every share she owns. However, in most cases, a company will not pay its entire EPS to shareholders, as it may want to retain some of its earnings for future investments. In fact, a number of high tech companies do not pay any dividends at all as they prefer to retain profits for future investments. Amazon is one such company. In case the company pays any dividends the difference between its net income and the dividends paid out to shareholders is referred to as retained earnings. This retained earnings is aggregated or accumulated on the balance sheet every year under shareholders equity. As a company makes profits every year and retains at least some of its earnings, shareholders equity will keep growing on the balance sheet. This brings us to the end of the income statement. Next time we will start looking at the statement of cash flows and how it is different from the income statement. [MUSIC]
