1. The income statement
Welcome back! In this video we will learn more about the income statement.
2. Income statement
The income statement reports revenues and expense for a specific period of time.
Where revenues is anything resulting from business activities for the purpose of earning income.
The most common type of revenues are Sales.
Expenses are the cost of assets consumed, or services used in the process of earning revenue.
It can be also referred to as the P&L or earnings statements.
3. A simple income statement
An income statement gives a company full overview over it's revenues and expenses over time. It gives key insights into the health of the business, and helps management to make the right decisions.
Company 1 has a revenue of $300, $200 in expense and thus a profit of $100. Company 2 has the same revenue but $400 in expenses, resulting in a loss of a $100.
4. Important metrics
To understand the income statement, it's important to grasp it's key metrics: Gross and net revenue, and gross and net profit. Let's dive deeper into all of these to better understand them.
5. Gross revenue
Gross revenue are earnings without subtracting expenses. Our lemonade business is flourishing and we're expanding into selling juicers. If we sell 10 juicers of hundred dollar each, gross revenue totals 1000 dollar.
6. Net revenue
Net Revenue are the revenues minus discounts, or money lost from product returns or missing products. A simplified formula for net revenue is gross revenue minus discounts minus returns.
One of the 10 juicers we sold to a customer was defective, so we had to return $100 to a customer. Our net revenue is thus $1000 - $100, or $900. Net revenue is the amount a company keeps from its sales.
7. Gross profit
Gross profit is the profit a company keeps after subtracting the cost of goods sold, or COGS from its net revenue. The cost of good sold include the direct costs of producing the goods sold by a company, such as the material used to create the good.
Let's go back to our juicers example. The 10 juicers, of which he had to return the money for 1 damaged juicer had a cost of $60. Our gross profit is thus $900 minus $600, for a gross profit of $300.
8. Net profit
Net profit is the profit earned by a company after subtracting COGS and expenses. A simplified formula for net profit is thus Gross profit minus expenses.
Net profit is often referred to as the bottom line, because it's positioned at the bottom of the income statement.
If we subtract two times $50 from our previous example, one deduction for salary, and one deduction for taxes we arrive at a net profit of $200.
9. Important metrics: summary
In Summary: Gross revenue is the total earnings a company makes, net revenue is the gross revenue minus discounts and returns.
Gross profit is net revenue minus COGS, and net revenue is Gross profit minus other expenses.
10. EBITDA
There is one more metric we have to go through: EBITDA. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of profitability.
It's an alternative way to look at profitability of a company. Don't worry too much about this metric for now, but note you'll see it throughout this course. If you want to learn more, you can use investopedia.com, which is a great resource for financial information.
11. Income statement
To summarize, the income statement reports revenues and expenses and allows you to know your net profit or loss for a specific period of time.
12. Let's practice!
With a better understanding of its key metrics, you're ready to dive in!