| Understanding Financial Statements. The term | | | | |
| financial statements refer to a complete set | | | | Tax |
| of statements that include an income | | | | - 600 |
| statement, a balance sheet and a cash flow | | | | |
| statement. The Income statement (sometimes | | | | Net Income |
| also called the Profit and Loss statement or | | | | - 4,900 |
| P & L accounts) reflects the profit | | | | 9.8% |
| performance of a business. This statement | | | | |
| summarizes sales revenue and expenses and | | | | The income statement is designed to be read |
| reports on the profit for a period. The | | | | on a waterfall concept. At the highest level, |
| foremost thing to understand is whether the | | | | are the overall sales and other income for |
| business has made a profit or loss and if so | | | | the business for a period. From this is |
| how much? Profit or loss is also usually | | | | deducted the Cost of goods sold. We follow |
| determined for a specific period whether it | | | | the matching principle to match revenue and |
| be a month, quarter, half year or year. | | | | costs. This balance after deducting the cost |
| | | | of goods sold is the gross profit ort gross |
| Exhibit 1 | | | | margin as it is sometime s called. From this |
| | | | margin operating expenses is deducted to |
| Income Statement for the year. | | | | derive the EBITDA. Operating expenses is all |
| | | | other expenses that are not part of cost of |
| Sales | | | | goods sold or those that are reported |
| - $ 50,000 | | | | separately such as depreciation. This |
| | | | includes selling, administrative and other |
| Cost of goods sold | | | | general expenses, legal expenses etc.This is |
| - 40,000 80% | | | | an acronym for Earnings before Interest, Tax |
| | | | and amortization and Depreciation. This is an |
| Gross margin | | | | important number to measure profitability and |
| - 10,000 | | | | compare different businesses in the same |
| | | | industry. Depreciation is a period charge for |
| Operating expenses | | | | use of fixed assets. This is deducted from |
| - 3,000 | | | | the EBITDA to derive EBIT. This is an acronym |
| 6% | | | | for Earnings before interest and tax. This |
| | | | also is an important measure for comparison, |
| EBITDA | | | | since eliminating interest and tax takes away |
| - 7,000 | | | | the non operational items of expense in a |
| | | | business. Interest and tax is deducted to |
| Depreciation | | | | derive Net income. |
| - 1,000 | | | | |
| | | | Comparison of the items between two periods |
| EBIT-Operating earnings | | | | could provide an insight into changes that |
| - 6,000 12% | | | | are happening in the business. Comparing the |
| | | | percentages also is an effective way to |
| Interest expense | | | | measure change. |
| - 500 | | | | |