Income Statement

Introducing Basic Components of an Income Statement

• An income statement includes the following basic components:

  1. Revenue
  2. Expenses
  3. Profits

• Intuitively, these components can be described as:

  • Revenue: Income made
  • Expenses: Costs
  • Profit: Income after costs

$$\text{Profit} = \text{Revenue } - \text{ Expenses}$$

Defining Terminology on an Income Statement

• COGS is the costs related to inventory

• Depreciation is the reduction in value of a tangible asset over time

  • Most tangible assets are fixed assets
  • Some tangible assets are current assets

  • Purchasing land or buildings outright aren't expenses

    • This wouldn't appear on income statements
    • Since there isn't depreciation
• Operating expense is the cost from normal business operations

• Amortization is the reduction in value of an intangible asset over time

  • Unlike depreciation, amortization applies to intangible assets
  • Some intangible assets are fixed assets
  • Some intangible assets are current assets

• Gross profit is the income made after deducting COGS

  • Gross profit is synonymous with gross income

• Net profit is the income made after deducting COGS and taxes

  • Net profit is synonymous with net income and earnings
  • Profitability refers to increasing yearly net profit margins

Illustrating Types of Expenses

• Depreciation

  • Vehicle depreciation
  • Equipment depreciation
  • Building depreciation

• COGS

  • Materials
  • Shipping charges
  • Direct labor or wages

• Operating Expenses

  • Indirect labor or wages
  • Rent
  • Administrative costs
  • Interest paid on debt

Calculating Profits on an Income Statement

$$\text{Gross Profit} = \text{Revenue } — \text{ COGS}$$ $$\text{EBITDA} = \text{Gross Profit } — \text{ Operating Expenses}$$ $$\text{EBIT} = \text{EBITDA } — \text{ Depreciation } — \text{ Amortization}$$ $$\text{EBT} = \text{EBIT } — \text{ Interest}$$ $$\text{Net Profit} = \text{EBT } — \text{ Taxes}$$

References

• Video about Income Statements
• Describing the Income Statement
• Defining Gross Income
• Defining Net Income