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