Calculating Pretax Financial Income

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  • 0:04 Coca-Cola in the Headlines
  • 0:50 Pre-Tax Financial Income
  • 1:30 Income Statement: Example
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we'll discuss how analysts calculate pre-tax financial income. We'll also walk through the calculation using Coca-Cola's 2015 and 2014 financial information.

Coca-Cola in the Headlines

Around the time Coca-Cola released its 2015 Annual Report, you may have seen newspaper headlines that read, ''Coca-Cola's Pre-Tax Income Hurt By Strong U.S. Dollar'' or ''Coca-Cola's EBT Down As U.S. Consumer Shifts Away From Soft Drinks.'' Those headlines were probably gibberish to you then, but by the end of this video, you'll have a good idea of what those headlines were trying to convey.

In this video, we'll first define pre-tax financial income and review a simple approach to calculate it. We'll then calculate Coca-Cola's pre-tax income for 2015 & 2014. Lastly, we'll examine each line item, and describe exactly what types of accounts/activities occupy that line item for Coca-Cola.

Pre-Tax Financial Income

Pre-Tax financial income is just like it sounds - it's the earnings a company generates before deducting the taxes it needs to pay. It measures the total revenue a company generated less expenses, excluding tax expenses. Analysts prefer this measure because it allows them to compare companies that may have different tax rates. Two identical companies may seem more different than they are if an analyst looks exclusively at their earnings because one may be domiciled in a higher tax country. Pre-tax financial income is also referred to as earnings before taxes (EBT). The two financial metrics are synonymous and can be used interchangeably.

Income Statement: Example

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Here is the 2015 & 2014 Income Statement section for Coca-Cola

Let's walk through how pre-tax income is calculated, starting at the top with the net operating revenues. This is the amount of money a company earned in a particular year before any expenses have been deducted. Next, we deduct the cost of goods sold. For Coca-Cola, these expenses include the cost to produce and package an item, like the ingredients that go into the syrup and the cost of the bottles, among other factors.

That gets us to gross profit, from which we deduct administrative, general, and selling expenses. This is a rather diverse expense account that can include everything from employee's salaries to the cost of advertising. We then deduct other operating charges. For Coca-Cola, these are expenses related to its new zero-based budgeting initiative and other restructuring costs. This gets us to operating income, also known as earnings before interest and taxes (EBIT).

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