When a company prepares its financial statements, one of these will include an income statement. The income statement shows if the company has made any money or not. If the net income is positive, the company is earning money. If the net income is negative, the company is losing money. When a company is making money, its board of directors may decide to share a portion of these earnings with its shareholders. When that happens, a dividend is declared and is paid out to the stockholders, typically in cash but it could also be in company stock.
Preparing an Income Statement
Determine the company's revenues. This is money coming into the company and typically includes the money earned from selling a product and/or providing a service. This number is sometimes referred to as gross sales.
Calculate the cost of goods and/or services sold. For products, this number will include the cost of obtaining the raw materials used to make the company's finished goods. This number includes the cost of labor in terms of manufacturing and selling the product.
Determine the general and administrative expenses. It includes any cost of personnel that supports your sales process, for example, the secretary, the janitor, the president of the company, the receptionist and the person working in payroll. It also includes expenses such as advertising, office products, even the cost of coffee for the machine in the break room.
Calculate other expenses. This would include rent and utilities and any expenses that were not included in the cost of goods sold, and general and administrative expenses.
Determine operating income by subtracting from revenues the cost of goods sold, the general and administrative expenses, and other expenses.
Calculate net income by adding to operating income any other income, such as interest, and subtracting any other expenses, such as taxes.
Obtain the total number of the company's outstanding shares. This number represents all of the shares that are available for buying and selling.
Determine the net income from the income statement.
Divide the net income by the total number of shares. This number is earnings per share. If the board of directors declares a cash dividend, it will be a number between $.01 and the earnings per share.