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How To Read An Income Statement?

Understanding Financial Statements. The term
financial statements refer to a complete setTax
of statements that include an income- 600
statement, a balance sheet and a cash flow
statement. The Income statement (sometimesNet Income
also called the Profit and Loss statement or- 4,900
P & L accounts) reflects the profit9.8%
performance of a business. This statement
summarizes sales revenue and expenses andThe income statement is designed to be read
reports on the profit for a period. Theon a waterfall concept. At the highest level,
foremost thing to understand is whether theare the overall sales and other income for
business has made a profit or loss and if sothe business for a period. From this is
how much? Profit or loss is also usuallydeducted the Cost of goods sold. We follow
determined for a specific period whether itthe 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  1margin 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
Salesgoods sold or those that are reported
- $ 50,000separately such as depreciation. This
includes selling, administrative and other
Cost of goods soldgeneral expenses, legal expenses etc.This is
- 40,000 80%an acronym for Earnings before Interest, Tax
and amortization and Depreciation. This is an
Gross marginimportant number to measure profitability and
- 10,000compare different businesses in the same
industry. Depreciation is a period charge for
Operating expensesuse of fixed assets. This is deducted from
- 3,000the EBITDA to derive EBIT. This is an acronym
6%for Earnings before interest and tax. This
also is an important measure for comparison,
EBITDAsince eliminating interest and tax takes away
- 7,000the non operational items of expense in a
business. Interest and tax is deducted to
Depreciationderive  Net  income.
- 1,000
Comparison of the items between two periods
EBIT-Operating earningscould provide an insight into changes that
- 6,000 12%are happening in the business. Comparing the
percentages also is an effective way to
Interest expensemeasure change.
- 500



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