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The Income Statement
Lecture 1
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Today’s Lecture
Excel Basics
Understand the elements of the Income statement
Use MS Excel to make a simple Income statement
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Excel BasicsAfter launching Excel, you should have a window that looks like this. What are its elements?
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Excel Basics – the various areasMenu Bar Tool Bars
Name Box
Sheet TabStatus Bar
Formula Bar
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Excel Basics – the cells
Cells
Currently Active Cell
Each cell has an address so that we can refer to it. E.g. this is cell E11.
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Excel Basics - helpHelp Box
If you type ‘formula’ in the Help Box and click return, you’ll get a short list of topics that are related to the term ‘formula’. Click on any of them to find out more about that topic.
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Excel Basics - helpHelp Box
After clicking ‘about formulas’ you’ll get the window to the left.
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Excel Basics – enter and edit data
Click on a cell and start typing ….
Cells can contain numbers, words or formulas
If you want to edit a cell, just click on it and type something new … or double click to edit its contents.
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Excel Basics – enter and edit data
Formulas start with an ‘=‘ sign.
Usually, formula cells display the result of the formula and not the formula itself. However you can see the formula in the formula bar.
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Excel Basics – references
The address of another cell can be used in formulas
E.g. if we enter the number 4 in cell B2, we can write our formula in cell B3 as: =B2*2.
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View Points
But it IS important to be aware that the same data (modeled with the same tools) can mean very different things to different people.
ManagementInvestorBankSupplierCustomer…
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Different Perceptions
P&L, Balance Sheet,Cash Flow
Customer
Management
Investor
“All right, I just wish I could do this online”
“No need to adapteverything is going well!”“Let’s take over something.”
“These guys will be out of business in a year”
The Company
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IncomeExpenses
That would give us some idea, but not really enough. Hence we’ll need a little more detail and it is customary to split Income and Expenses up into the main items.
Let’s just think of what a company does …
Very roughly, from a financial point of view, there are two basic things: Money IN and Money OUT. Or, in more proper terms, we have:
$ IN
$ OUT
Elements of the Income Statement
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Sales (a retail or manufacturing operation)
Service (a doctor or consulting firm)
Interest (an investment firm)
Commissions (a money changer or broker)
Income
In many cases, especially in the case of smaller companies, this is just one or two items depending on the nature of the business
$ IN
Elements of the Income Statement
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Cost of Sales
Wages
Interest (on loans)
Rent (for office and store space)
Taxes
…
Expenses
Usually, there are a least a few categories. Exactly which ones again depends on the nature of the business.
$ OUT
Elements of the Income Statement
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Let’s have a sneak preview…
+ Sales
- Cost of Sales
= Gross Profit
- Other Expenses
= EBITDA
- Interest, Taxes, Depreciation and Amortization
= Net Income (hence Profit if +, and Loss if -)
So many terms … don’t worry, it’s not too bad.
We’ll go over them one by one.
A quick preview
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Gross Profit
This is the first indication of how a company is doing (if this is negative, watch out!).
The gross profit is basically the difference between the income from the main line of the business minus the actual cost associated with generating that income.
For a shop i.e. : Gross Profit = Sales – Cost of Goods sold.
Elements of the Income Statement
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Gross Profit
Be careful though! Gross Profit (as is the case with quite a few accounting terms) can be defined in many ways.
In the case of a small shop, there will probably be little dispute about what Gross Profit is (sales price – cost price). But how about service or labor intensive industries.In general, wages closely related to e.g. production are included in ‘cost of sales’ but wages of the upper management are not. The question will be: where to draw the line?It is often up to the individual company to decide what exactly is part of the ‘cost of sales’ and what not.
Elements of the Income Statement
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Other Expenses
In the end, all expenses need to be accounted for somewhere. Hence everything that is not part of ‘Cost of Sales’ and ‘EBITDA’ is lumped together here.
This may include: Wages, Rent, Advertising ….
Elements of the Income Statement
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EBITDA
Earnings before Interest, Taxes, Depreciation and Amortization
This is quite a mouthful, but fortunately not as difficult to understand as one would initially think.
EBITDA provides important insight into how well the company is doing from an operational point of view. This is also called ‘operating profit’
Let’s have a closer look at the five terms.
Elements of the Income Statement
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EBITDA - Earnings
This is probably the easiest term. To many, it is just another word for profit (or ‘money made’).
However, many professionals prefer the term earnings when certain items are excluded (as in EBITDA).
Elements of the Income Statement
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EBITDA - Interest
Many companies borrow money in order to finance their operation or their expansion plans. Naturally, the companies will need to pay interest on the money they borrow.
Sometimes this number can be negative when companies have excess cash.
Elements of the Income Statement
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EBITDA - Taxes
We all need to pay taxes and so do companies … well most of the time. There are many exceptions and rules of course.
Elements of the Income Statement
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EBITDA - Depreciation
When a company buys equipment, it is reasonable to spread the costs over several years such that the entire cost is accounted for by the time the equipment reaches the end of its useful life.
A computer e.g. is often written off over a time period of three years. This means that each year, e.g., one third of the computer’s cost is subtracted from the Gross Profit.
Doing this provides a more accurate picture of the true performance of the company.
Elements of the Income Statement
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EBITDA – Depreciation continued
If a company would write off its equipment in one go, it could incur an artificial loss in the first year and an artificial profit in subsequent years.
Such a distortion of the financial performance would make it very difficult to judge whether the company is doing well or not.
Elements of the Income Statement
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EBITDA - Amortization
Basically, this is the same as depreciation but rather than spreading the cost of equipment over a time span, Amortization is the systematic reduction of a lump sum paid or the write off of an intangible asset over time.
Example of Lump Sum: Spread out the costs of hiring a ‘super CEO’ over the time of his contract.Example of Write Off: Spread the expenses related to a copyright over the economic lifetime of the copyright.
Elements of the Income Statement
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Net Income
Net income is the real profit or loss of the company. In other words, the money that the company has earned (unless it’s loosing money of course) for its owners.
Elements of the Income Statement
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A convenient table that lists Income and Expenses and sums them up.
+ Sales
- Cost of Sales
= Gross Profit
- Other Expenses
= EBITDA
- Interest, Taxes and Amortization
= Net Income (hence Profit if + and Loss if -)
So what is an Income Statement?
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A B C D E F G23 Golden Win Double Dragon International4 Income Statement56 Sales 112007 Cost of Sales 72008 Gross Profit 4000 =D6 - D79 Other Expenses 120010 EBITDA 2800 =D8 - D911 ITDA 80012 Net Income 2000 =D10 - D11
The data is here, but this is neither very informative nor very easy to understand.
An Example in Excel
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A B C D E F G2
3456 Sales 112007 Cost of Sales 72008 Gross Profit 4000 =D6 - D79 Other Expenses 120010 EBITDA 2800 =D8 - D911 ITDA 80012 Net Income 2000 =D10 - D11
Golden Win Double Dragon InternationalIncome Statement
This looks a lot better but it’s still not so informative.
Use the Center and Merge ButtonChange the Font
Make the subtotal bold
Underline before the subtotal
An Example in Excel
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2
3456 Sales 11,330 100% =D6/D$67 Cost of Sales 7,200 64% =D7/D$68 Gross Profit 4,130 36% =D8/D$69 Other Expenses 1,200 11% =D9/D$610 EBITDA 2,930 26% =D10/D$611 ITDA 800 7% =D11/D$612 Net Income 2,130 19% =D12/D$613
Golden Win Double Dragon InternationalIncome Statement
A simple income statement is indeed easy to make in Excel!
Add the percentage for each row
An Example in Excel
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An Example in Excel
Why the $ in the formula for the percentages?
Wait a moment … Why do the percentages fail to add up? After all shouldn’t “Cost of Sales + Other Expenses + ITDA + Net Income” be 100%?
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Key Points of the Day
The Income Statement sums up all the income and expenses of a company in a convenient way.
It is quite straightforward to put the Income Statement into Excel
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References Better than most books!
