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