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