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Income Statement

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by

ashish chawla

on 30 June 2016

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Transcript of Income Statement

Income Statement
Segment Reporting
COGS
Revenue Recognition
For most businesses, income is recognized as revenue whenever the company
delivers / its product / performs service
receiving payment for it. However, there are exceptions:
Buyback agreement
Sales returns
Revenue / Sales
Revenue is the amount of money that is brought into a company by its
business activities
which is also known as Sales
Sales = Price (P) x Quantity (Q)

The total revenue (TR) for a firm which is selling 50 television sets at USD 1,000 each.

TR = P X Q
= USD 1,000 x 50
= USD 50,000

Gross Sales
Grand total of all sale transactions reported
in a period,
without any deductions

Net Sales
Defined as Gross Sales minus the following three deductions:
Net Sales = Gross Sales - (Sales discounts + Returns + Allowances + Excise duty)

Sales discounts
- An early payment discount, such as paying 2% less if the buyer pays within 10 days of the invoice date

Sales returns
- A refund granted to customers if they return goods to the company

Allowances
- A reduction in the price paid by a customer, due to minor product defects

Excise Duty
- Indirect tax levied on manufacture,
sale, or use of locally produced goods

A monthly magazine receives 1,000 subscriptions of $240 to be paid at the beginning of the year. Each month it recognizes revenue worth $20,000 [($240 ÷ 12) × 1,000]
Revenue by Product
Segment reporting provides information on the most important
Operating units
of a company

The revenue can be reported in various segments as below:
1> Revenue by Product
2> Revenue by Geography
3> Revenue by Service Line


Revenue by Geography
Revenue by Service Line
Gross Profit
: COGS can be deducted from Net Sales to calculate a company's Gross Profit
Gross Profit
= Net Sales - COGS
Intersegment Sales
The
direct costs
attributable to the production of goods/ service sold by a company. This includes-

1> Cost of the materials used in producing the product / service
2>Direct labor costs used to produce the product / service
Selling Expenses
Sum of all
direct and indirect
selling expenses and all general and administrative expenses of a company
Direct selling expenses: Expenses directly linked to the sale of a specific unit such as sales commission, shipping supplies and delivery expenses

Indirect selling expenses: Expenses which are proportionally allocated to all units sold during a certain period, such as advertising and marketing costs, salaries of sales personnel etc
General & Admin Expenses
Expenses include salaries of non-sales personnel, rent, heat and lights, depreciation etc.
EBIT/ Operating Profit
Earnings before Interest and Tax (EBIT) measures the
profit a company generates from its operations
Indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest
EBIT is also referred to as "Operating earnings", "Operating profit" and "Profit before Interest and Taxes (PBIT)
EBIT

= EBITDA- Depreciation and Amortization
Used to remove from the financial statements any transactions involving dealings between the various segments within the company 
Transfer or exchange of goods for
monetary compensation
from one department in a company to another within the same company 
Sales reported at the group level may not always be equal to the sum of the segmental revenue because of Intersegment Sales 
Intersegment Eliminations
EBITDA
Essentially net income with interest, taxes, depreciation, and amortization added back to it
Used to analyze and compare profitability between companies and industries as it eliminates the effects of financing and accounting decisions.
EBITDA

= Revenue – Operating Expenses

EBITDA margin is a measurement of a company's
operating profitability

EBITDA Margin
= EBITDA/Revenue
Depreciation
A method of allocating the cost of a
tangible asset
over its
useful life
.
For example, if a company buys a piece of equipment for $1 mn and expects it to have a useful life of 10 years, it will be depreciated over 10 years.
Asset can be Depreciated in 2 ways:
Straight Line Method (SLM)
- Charges cost evenly throughout the useful life of a fixed asset. This method is appropriate where economic benefits from an asset are expected to be realized evenly over its useful life.
=(Purchase cost – Residual value) / Useful life

Written Down Value (WDV)
- This method involves application of a pre-determined percentage of the
Book value of the asset
. The amount of depreciation reduces every year. Also known as 'Reducing Balance Method'
Amortization
Spreading out of
Capital expenses
for
intangible assets
over a specific period of time (usually over the asset's useful life). It is
similar to depreciation
, which is used for tangible assets.
Amortization
where, Operating Expenses= COGS+ Selling, General & Admin Expenses (SG&A)+ R&D Expense
Net Interest Expense
Interest expense/ income is a
Non-operating
item
Net Interest Expense
=
Interest Expenses - Interest Earned
EBIT- Net Interest Expense
Earnings before Tax (EBT)=
Income Tax
Expense recognized by the business in an
accounting period
for the government tax related to its
taxable income
.
For eg, if ABC Corp has $100,000 of EBT, and the government imposes a tax of 35%, then ABC should
record a income tax expense of $35,000.

Derived by deducting the income tax amount payable from the PBT (Profit before Tax ) or EBT (Earnings before Tax)
Profit After Tax (PAT)
PAT
= EBT(PBT) - Income Tax
For eg, If a company has 100,000 as its PBT. The tax rate is 20% p.a. So, PAT = PBT – Tax , i.e. [100,000 – (20%*100,000)=80,000]
Earning Per Share
(EPS)
EPS represents the portion of a company's earnings that is allocated to each outstanding share of common stock/ equity
EPS
=(PAT - Dividend on Preferred Stock)
/ Total Shares Outstanding
Example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires.
The accounting standard IFRS 15 sets out the requirements for recognising revenue that applies to contracts with customers
Interest Expense
- Interest payable on any type of borrowings – bonds, loans, convertible debt etc.
Interest Income
- Interest earned from loans and deposits - Savings Account, Certificate of Deposit, Investments etc.

Difference between revenues generated by
interest-bearing assets
and the
cost of servicing
(interest-burdened) liabilities
Income Tax =
(EBT x Corporate Tax Rate %)
Net amount
earned by the business after accounting for all operating/ non operating expense/ income
including Taxes
Serves as an indicator of a company's profitability
EBT
Company's profit before it has paid corporate income tax.
All expenses from revenue including interest expenses and operating expenses are
deducted except tax
.
It is also known as
Profit Before Tax (PBT)
Income Statement
Measures a company's financial performance over a
specific accounting period
Summary of
revenues
and
expenses
of a business classified as:
Operating and
Non-operating activities
Examples : Copyrights, Government licenses, Patents, Trademarks etc
Company XYZ purchased a machinery for $1.25 mn. It agreed to depreciate the patent at 13.91% each year for 4 years.
Also known as the "Profit and Loss statement" or "Statement of Revenue and Expense"
Full transcript