The Basics of Financial Statements -- Income Statement Terminology

An Income statement is to a business, what the scoreboard is to sports. It tells you if you winning or loosing and by how much. If you are buying a business the income statement tells you if the business making money, if its selling its products, and how good it it is at doing both.

The income statement reflects the performance of the company over some period of time time.  The income statement is also called a profit and loss (P & L) or an earnings statement

Sample Income Statement  

Income Statement Line by Line

1. Time Period. Statements are usually by year or quarter (3 months)  But may also be to -date (partial year up to the date of the income statement). Multiple years may be shown on the same statement to help with comparisons.

2 -5. Revenue section tells you about the money a business brings in. Also called sales. There may be multiple sources listed, of different types, based on the type of business. In the case of the hot dog stand It's broken out by type of customer. Other business might show category of product (e.g Cars and Trucks) or customer source (internet, or walk-in). It depends on the what makes sense to that specific business.

7.-15 Expense Section tells you money the business spends. Also called costs. Expenses are also broken up into categories relevant to the specific business.

8. In the restaurant business food is very important, so it gets its own line item.

9. Employee costs are usually significant in most business so they almost always get their own line(s).

10 - 11 Rent and sales tax are usually important to retail business so on this statement they get their own lines as well

12. SGA is a catch all for small expenses. Depending on the business you may or may not see this line. If a large amount of money is spent on marketing I'd expect to see it as its own item so you might have a 'General and Administrative' line. (Thre is no naming convention for most items on an income statement, so you may find other terms used to define various expenses)

13. Depreciation (and Amortization) is a special kind of expense that is used to reduce profit for tax and reporting purposes. IT allows you to spread out the cost of a large purchase over  a period of time.  (The time varies based on accounting and tax rules for different items.) The original cost is not reflected on the income statement, just the depreciation.

14. This Company has a line of credit, so the interest is reflected here.

16. Net Incomis the 'accounting' profit of the business. This is  revenue minus the  expenses from the income statement.  Taxes are typically calculated using this number

17. EBIT (Earnings Before Interest and Taxes) is the net income less the interest expenses. From a business purchase standpoint interest usually isn't important because typically you don't buy debt when you buy a business.

18. EBTDA (Earnings Before Interest and Taxes and Depreciation and Amortization) is the EBIT less the non-cash Deprecation expenses.

19. Cash Flow is EBTDA less owners compensation and other extraordinary expenses. Its supposed to give you a feel for how much money the business 'really' makes. Extraordinary expenses (like recovery from an fire) are not normal and excluded since they shouldn't happen again.  As the owner the compensation you receive could aslo be considered profit,  so its added back.  Beware of cash flow numbers since there is not a  rule for  calculating them. Make sure, once you are serious about a business, that you get the details for this calculation.

Disclaimer: I am not a lawyer or an accountant. Any information provided here should be reviewed by the appropriate professional before it is used to make any significant financial, legal, or other  decisions.


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