Last class we learned the balance sheet. In this class we are going to learn the income statement. The income statement measures performance over some period of time, usually a quarter or a year. As you can see in this simplified income statement for SamSung Electronics, the first thing reported on the income statement is revenue and expenses from the firm's principal operations. SamSung Electronics has a revenue of about 200 trillion Korean Won in 2015. And its cost of goods sold is about 105 trillion Korean Won. Selling, general, and administrative expenses is about 48.5 trillion Korean Won. And depreciation is about 20.9 trillion Korean Won. As you already learned, depreciation is not an actual cash expenses. Instead it is an account expenses. That is, SamSung made capital expenditures in the past, but it was not considered as expenses at the time of the investment. However, fixed assets are soon to be depreciated every year and part of the capital expenditures are considered as expenses every year. And it is called depreciation. When cost of goods sold, SG and A expenses and depreciation are subtracted from sales, we get earnings before interest and taxes. We call it EBIT for short. The last item is net income. And it is what available for shareholders after paying interest and taxes from EBIT. SamSung dividend payout ratio is about 16%, and its dividend amount is 21,000 Korean Won per share. Suppose a firm had 200 million shares outstanding at the end of 2015 and its net income was $400 million for the year. What was earnings per share? Earning per share or EPS for short is $400 million divided by 200 million shares. So $2 per share. If its total dividend amount was $100 million, what was dividend per share? Dividend per share or DPS for short is $100 million divided by 200 million shares, so $0.50 per share. Dividend payout ratio is dividend amount divided by earnings amount, so $0.50 divided by $2 per share is 25%. That is, the company pays 25% of its earnings to shareholders, and reinvests 75% of its earnings in the firm. In the previous example, we learned that depreciation is not an actual cash expense. Because of this kind of non-cash item, accounting income is different from cash flow. Suppose Yonsei Corporation purchased a machine for $700, and it is depreciated over a seven year period using straight line method. Then the depreciation is $700 divided by seven years is $100 per year. Then $100 will be deducted each year as an expense. However, it is important to note that this $100 deduction is not cash. It is an accounting number. The actual cash outflow occurred when the asset was purchased. In reality, the difference between cash flow and accounting income can be pretty dramatic. For example, consider the case of SamSung Electronics. For the year ended December 31st 2015, Samsung reported a net income of about 18 trillion Korean Won. But its operating cash flow was about 40 trillion Korean Won. The difference is about 22 trillion Korean Won. Next, let's talk about taxes. Corporate tax is one of the largest cash outflows. For example, tax rate is 35% for Japan, 48% for U.S. and 33% for France. For some countries tax rate is quite lower than others, for example tax rate is 17% for Singapore and 20% for Thailand. Such low tax rates make it attractive for foreign companies to set up businesses in those countries. When you make financial decisions it is important to distinguish between average and marginal tax rates. Your average tax rate is your tax bill divided by your taxable income. In other words, it is the percentage of your income that goes to pay taxes. Your marginal tax rate is the rate of the extra tax you'd to pay if you earned $1 more. The difference between average and marginal tax rates can best be illustrated with a simple example. Suppose a firm has a taxable income of $200,000. What is the tax bill? Suppose our tax table is what's shown in the slide. We can figure out tax bill as the following. The total tax is thus $61,250. In this example, the average tax rate is 61,250 divided by 200,000 is 30.625%. The marginal tax rate is the tax on the last dollar of income, so it would be 39%.
