Account settlement is a non-American term showing the summation of commercial activity of a business during its fiscal year. Companies will use the account settlement to paint a picture that investors use to determine whether they will invest in the company. Some of the key terms of an account settlement are defined below.
Net sales: Gross sales is the total amount in currency (such as euros) of goods sold during a particular period. Normally, this would be the company’s fiscal year. This may or may not coincide with the country’s calendar year. Net sales is the total amount of sales in currency minus any returns, deductions for damaged goods, or discounts.
Operating income: This figure shows the power of the company to earn money. Operating income is the total amount the company earns before deducting interest payments and taxes. Investors can use year-on-year comparisons to determine whether the company is improving or not improving. Some companies will simply state this as profit before taxation.
Ordinary income: Sometimes companies can beef up their income levels by selling property or other capital holdings. In order to see a “bottom line” of income from the companies’ commercial activities, companies will publish their ordinary income, or income from things other than capital gains (selling land, factories, etc.).
Net income: Net income is the bottom line of whether a company is making money. Net income is a company’s total revenue minus expenses needed to produce the revenue (salaries, materials, etc.), taxes, depreciation, and interest payments. This figure is one of the key figures (if not the key figure) investors use to determine whether they will invest in a company.
Operating margin: Companies express operating margins as percentages. Operating margin divides operating income by net sales. Operating margin seeks to take out variable costs so that investors can see how well the company can pay off fixed assets like debt or capital investments.
Earnings per share: Earnings per share is another figure used by investors to determine whether the company is profitable and worthy of more investment. While earnings per share can be slightly different depending on how it is defined, generally, earnings per share is income minus dividends of preferred stock (as opposed to an ordinary stock share which we are measuring here) divided by the number of outstanding shares. What makes this tricky is that the number of shares outstanding can fluctuate. Additionally, some overseas companies will remove “minority interests” income from their profit. Minority interests income is income from a company’s investment in another company.
In addition to these key terms, the account settlement can be broken down by individual business units for large companies. For instance, if one were to look at British Petroleum’s (BP’s) account settlement, one would find account settlement for exploration and production, refining and marketing, and other small business units (alternative energy, shipping, treasury, aluminum asset, and other corporate activities) listed as Other Business and Corporate—Financial Statistics.
Finally, the account settlement will offer a narrative of future operations. Included in this narrative can also be a bridge between how recent acquisitions or operational expenses that may have weighed heavily in the current fiscal statement will bring about greater profit/income in future income statements. If a catastrophic event occurred (i.e., Hurricane Katrina), this impact may be mentioned here also.
- British Petroleum, Annual F&OI, www.bp.com (cited March 2009); “Earnings Per Share,” Moneyterms.co.uk (cited July 2008);
- “Operating Income/ Net Sales/Operating Margin/Net Income,” InvestorWords.com (cited March 2009).
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