1. Introduction to the income statement
In this video, we will learn about the income statement.
2. The income statement
An income statement shows a company's revenue and expenses over a point of time.
Revenue is the money the company brings in by selling its goods and services and expenses are the costs incurred in the process.
Expenses can be further broken down into operating expenses and non-operating expenses. Operating expenses are the costs incurred to run the core operations of the business, and non-operating expenses are essentially any other expenses.
3. Example of income statement
Here we see an example of an income statement.
Some examples of operating expenses we can see here are the cost of goods sold and depreciation.
Interest expenses is an example of a non-operating expense. Subtracting the costs from revenue brings us to income before taxes. Here, a tax of 15% is charged on the income before taxes.
Subtracting the taxes from the income before taxes brings us to net income, which is sometimes referred to as profit.
4. Gross margin
Now, on to some financial ratios that can be computed using information from the income statement.
The ratio of total revenue without the cost of goods sold to total revenue is the gross margin.
It shows us the proportion of surplus revenue left after factoring in the cost of goods sold.
5. Operating margin
The ratio of total revenue subtracted from operating expenses to total revenue is the operating margin.
It shows us the proportion of surplus revenue left after factoring in the operating expenses.
6. Family of ratios
The two ratios discussed in this video belong to the family of efficiency ratios.
Efficiency ratios are measures of how efficient a company is in using its resources to earn profits.
7. Let's practice!
Now that we have learned about the income statement, let's practice some of the new things we learned.