Learn how to understand Financial Statement of a company (with examples)

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Finance Management Course
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  • 12 lessons
  • 6 quizzes
  • 1 week duration

3.2 Income Statement Terminology

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There are few income statement terminologies that you should know. I have listed them below:

Gross Margin

It is the amount earned by the company after reducing the cost of the goods sold.

Sales – Cost of Goods Sold = Gross Margin/Gross Profit

Sometimes people confuse Gross Profit and Revenue. Revenue is Sales. It is the total of what brought in by the selling the products. Revenue and Sales are the same thing.

Gross Profit is when costs incurred to manufacture the goods are removed from it.

Operating Profit or EBIT

Operating Profit/Income is also called Earnings before Interests and Taxes.

It is derived after removing all the operating expenses from the Gross Profit. As you can see in the example shown in the previous lesson.

The Gross Profit was $120,000 and Operating Expense was $80,000. The difference $40,000 was the total earning or the income of the income. But at this point, it has not paid an interests on its loans or paid any taxes.

The related terms are IBT called Income before Taxes. Here, the interests are paid but taxes are not paid.

Depreciation

As per the accrual accounting, the depreciation are reduced from the earnings. So you can add a sub-category Depreciation under the Operating expenses and reduce it from the revenue.

Remember, depreciation is just a superficial reduction in the earning. Company faces no actual loss of money. It is an accounting method to show the reduction in the value of the assets.

Cost of Goods Sold

It is the cost incurred by the company in manufacturing the product. These are the direct costs such as cost of raw materials, labor, and others.

You can use following formula to calculate the COGS:

COGS = Beginning Inventory + Purchases during the period – Ending inventory

Earnings per Share

It is the ratio of the net income after taxes and the total number of issues shares.