Introduction to the income statement발음듣기
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Introduction to the income statement
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I figure now is as good a time as any to learn about probably what most people focus the most on when they analyze companies, and that's the income statement.발음듣기
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And the income statement is one of the three financial statements that you'll look at when you look at a company.발음듣기
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There's the income statement and the other two are the balance sheet, which I have drawn a lot in a lot of the other explanations I've done on the financial crisis and whatever else.발음듣기
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And actually, in this video, we're going to see how the income statement relates to the balance sheet.발음듣기
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And, of course, the last one - well, it's not of course if you don't know it - is the cash flow statement.발음듣기
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And we'll focus on that a little bit later because that's a little bit more nuanced relative to the income statement.발음듣기
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So the income statement is literally just saying how much a company might earn in a given period, and it's always related to a period.발음듣기
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Those are usually the two types that you see, but sometimes, there's monthly or six-month income statements.발음듣기
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And the general format is pretty consistent, although there is a lot of variation depending on what a business does, but in this video, I really just want to cover almost a plain vanilla income statement for a company that just sells a widget.발음듣기
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And that money that they give you - and I'm not going to get too technical about the accounting right now - is considered revenue.발음듣기
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And some of you accountants out there are like, oh, well, no, that's not just the money that they give you.발음듣기
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But for our sake, let's just say that when you give the widget, you have earned the money that they give you, and that's revenue sales.발음듣기
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So let's say the revenue or the sales in this case in a given period, let's say that this is an income statement for 2008.발음듣기
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Finance, you could do this right now, instead of writing $3 million, you'll see $3,000 there.발음듣기
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But that's not how much income we made, because there was a lot of cost that went into making that widget that we have to account for.발음듣기
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So the first thing that you tend to see on an income statement is the cost of those actual widgets, the cost of producing those widgets.발음듣기
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There's a variable cost which is, each widget, they might have used some amount of metal and some amount of energy to produce it and some amount of paint if it's a painted widget.발음듣기
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And so that the cost of goods is literally how much did it cost to buy the metal and the paint and provide the electricity to make those $3 million worth of widgets.발음듣기
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And then on top of that you have the fixed costs, or the relatively fixed costs, where just to have the factory open, it costs a certain amount of money every year, regardless of how many widgets you make.발음듣기
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And we'll go into more detail on that, But for simplicity, let's say all those costs of making the widgets were $1 million.발음듣기
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And then if you subtract your costs from your revenue, or if you just add these two numbers, because this one is negative, you have your gross profit.발음듣기
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And this number tells you, how much money did you make, or how much profit did you make just from selling these widgets?발음듣기
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So this is your profit before all of the other expenses that a company has to incur, like the taxes and the CEO's salary.발음듣기
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Because the CEO doesn't go out there to the factory in most cases and actually help make the widget.발음듣기
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So the CEO's salary or the CFO's salary or the headquarters in a nice skyscraper, that doesn't get factored in here.발음듣기
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Sometimes you have to pay salespeople, so you might have sales expense, and then the stuff like the corporate office and the CEO's salary, and you have to hire auditors and accountants and all of that.발음듣기
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If you see SG&A - sometimes instead of that you'll see SG&A - that mean selling, general and administrative expenses.발음듣기
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It could be just the cost of having salespeople travel around the country and taking people out to steak dinners.발음듣기
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And then the general and administrative, that's just all the stuff that the corporate office does, and all the people who are at that level.발음듣기
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And let's say G&A, the corporate offices and all of that, let's see that's another $300,000.발음듣기
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This is really important to pay attention to, because so many people say, oh, a company made this much.발음듣기
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And you'll hear these numbers, gross and operating profit and net profit and pretax profit, and it's very hard to understand that these are actually very, very different things, because they all have the word "profit," and what does gross and operating and all that mean?발음듣기
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Let's calculate this number first before I go off on one of my tangents on all the differences between the operating and the gross profit.발음듣기
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I made $2 million just from actual widget sales, but then when you take out all of the overhead of the company, the marketing, the sales, the general and administrative expenses, I'm only left with $1 million.발음듣기
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And this is the profit from the operations of the company, or you could say from the assets or from the business or from the enterprise of the company.발음듣기
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But we can see - I've drawn a bunch of balance sheets before and I think this is a good time to draw a balance sheet.발음듣기
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And we'll talk a little bit more about assets and enterprise value, and there's a little bit of a nuance there, but essentially the company itself.발음듣기
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Before you think about how the company is paid for or how it's funded, if you just think about the enterprise itself, the assets.발음듣기
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They're generating the operating profit, and that's a very important thing to realize in the future when we talk about return on assets.발음듣기
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Let's say our assets, if we paid $10 million for these assets, and these assets - this is the income statement for 2008 - are spitting out $1 million a year, or at least $1 million in this year, our return on asset-발음듣기
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I wasn't planning on introducing this, but it doesn't hurt to introduce it right now - our return on asset, often acronymed ROA, would be - well, the numerator is the return, which is $1 million.발음듣기
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So that's a nice thing to keep in the back of your mind, this return on asset concept, and it's very closely tied to operating profits and the actual assets of a firm.발음듣기
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What we've learned, and especially if you watched some of my other economics videos, that all companies aren't financed the same.발음듣기
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So let's say that company had $10 million of assets, but let's say they paid for it with $5 million of debt.발음듣기
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But, of course, that's not the money that we get to take home, because we have to pay this interest.발음듣기
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And obviously, a company that has no debt will have no interest expense, but in this case, we do.발음듣기
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So let's see, if we have $5 million of debt, and we're paying 10% on that, 10% of $5 million is $500,000 a year in interest.발음듣기
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And now we are left with our - we're getting close to where we need to get to - pre-tax income.발음듣기
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Let's say that it's a 30% corporate tax rate, and you're going to take 30% of this number right here.발음듣기
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And when I say book value, that's just a fancy way of saying this is what our accountants say that we paid for the stuff.발음듣기
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And we'll talk later about depreciation and amortization and how we might change what these values are, but a very simple way is, if you went out and bought $10 million worth of stuff, you'd write on your books, I have a $10 million asset.발음듣기
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And if you took a $5 million loan, then what you really own, if you were to kind of sell all of this, you would get $5 million of equity.발음듣기
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When we did return on asset, we looked at the operating profit, because this is what our company generated before we paid the bank or Uncle Sam or anything like that.발음듣기
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And that's interesting because, well, why that's lower is - well, I don't want to go into too much depth because I realize I'm already pushing my time limit.발음듣기
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But at this point, you should have a good understanding of at least a basic income statement of a company that sells widgets.발음듣기
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And in the future, we're gonna look at a lot of different companies, financial companies, insurance companies, natural gas pipeline companies, that will have very different-looking income statements, but this gives you the general template for how things work.발음듣기
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And at least it'll give you a sense of how revenues, gross profit, operating profit, pre-tax income and net income really are different.발음듣기
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