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How To Read An Income Statement?

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




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