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The Daily Technical #71: What are the two ways to calculate earnings per share (EPS)?

How to answer "Do inventories get captured on the income statement?"

December 18, 2024

Good morning. Welcome to the 71st edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Do inventories get captured on the income statement?

There is no inventory line item on the income statement, but it gets indirectly captured, if only partially, in cost of goods sold (or operating expenses). For a specific period, regardless of whether the associated inventory was purchased during the same period, COGS may reflect a portion of the inventory used up.

The two other financial statements would be more useful for assessing inventory as the cash flow statement shows the year-over-year changes in inventory, while the balance sheet shows the beginning and end-of-period inventory balances.

Common Mistakes

  1. Mistakenly assuming inventory appears directly on the income statement. Remember, inventory impacts the income statement indirectly through the Cost of Goods Sold (COGS).

  2. Focusing solely on the income statement for inventory analysis. To avoid missing crucial information, always consider what the balance sheet and cash flow statement offer about inventory changes and balances.

TL;DR

  • Inventories aren't directly listed on the income statement, it appears indirectly via cost of goods sold (COGS) or operating expenses.

  • COGS includes inventory used, not necessarily bought, during the period.

  • For a detailed inventory view, check cash flow (year-over-year changes) and balance sheet (inventory balances).

TODAY’S QUESTION
What are the two ways to calculate earnings per share (EPS)?

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