Earnings – A Major Financial Consideration
Earnings refers to the financial advantages of the performance of a company. It indicates the net profits that the corporation receives from its activities. Earnings per share (EPS) is the first measurement of earnings that is generally made in the business environment. Other measures of earnings are cost of sales, inventory turnover and cost of good sold (COG). Earnings surprises can also affect the market perceptions of a company. To measure earnings accurately it is imperative to adopt the right methods of measurement that are appropriate for the type of business.
Earnings excluding expenses are referred to gross profits. By adding cost of goods sold, net cost of production, current costs of production and labour market effects one can arrive at the essence of earnings. The other measures of earnings are price to book ratio, price to sales and price to book profit margin. Cost of sales represents the direct cost of producing items sold and represents the drivers of gross profit. Current cost of production represents the operating overhead that increases with the increase in production. Labor market effects the cost of employing people to perform various tasks and this is the measure of earnings relating to the entry and exit costs of workers.
The net earnings are those after deducting expenses that include EI and I taxation, government taxes and the income tax. Earnings must be reported in accordance with the generally accepted accounting principles (GAAP). All company information is provided in the financial statements and should be prepared in accordance with GAAP.