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Accounting Allah shmoop below the line expenses Okay everybody take

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a deep breath and pinch your nose We're going below

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the line All right here's line This was life above

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the line And here is life below the line Yeah

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the line Well it's where gross profits of production hit

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The road above the line lives just the basic stuff

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to make the product like for the lemonade stand it's

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the lemons the cops and the labour toe Pour the

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end result Or for pillow talk Well it's the clan

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style sheets the feathers and the sewing labor And if

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they come with the Bluetooth sleepy time at on well

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then it's a speakers and IO devices or input output

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devices as well The cost of all that stuff and

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the cost of sewing it in there Yeah that's it

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All above the line It's above to make the product

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below the line Expenses refer to more broad attributions of

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company expenses that do not necessarily relate on a one

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for one basis to the unit sale of products the

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company is creating Let's take another look at that part

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of the income statement where below the line expenses includes

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things like marketing Well marketing in this sense refers to

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a few things First it refers to an analysis of

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the numbers What venues are selling our pillows is Macy's

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killing it for us and Nordstrom is doing terribly Is

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Ceres actually where America shops for pillows right Well marketing

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in this sense also refers to the spend of dollars

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on ads in newspapers radio television billboards the Internet and

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paint logos ascribed to the heads of bald men willing

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to lease their scalp for five bucks a day All

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right moving on Sales costs are a different animal If

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marketing is the religion than sales costs are the temples

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churches and mosques Yeah Sales costs relate on a much

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more direct basest with the sale of product and many

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companies include sales costs as an above the line expense

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But regardless on our pillow talk income statement note that

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both marketing and sales costs go up at a rate

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roughly equal to the rate at which revenues have increased

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OK next up depreciation and amortization Alright we'll delve much

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more deeply later But just remember for now that the

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concept are first to the notion that the company has

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spent a lot of money up front toe by something

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relatively expensive That asset will slowly decline in value over

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time and will need to be replaced Or at the

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very least we'll be less of an asset to the

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company should it ever be sold As a result company

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must show the decrease in value of that asset on

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the income statement even though the net total value of

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that asset would be carried instead on the balance sheet

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Right If this confusing that's good news It means you're

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paying attention This is a difficult concept to grasp Okay

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what about office rent Well office rent goes up modestly

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over time and it reflects the company's ability to sell

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more pillows without hiring very many new people That's a

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good thing for investors are well The same clearly holds

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true for the cost of insurance and lawyers Alright next

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line interest will Interest refers to the fact that the

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company carries well a fair amount of debt Specifically the

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company took out a loan for fifty million dollars and

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agreed to pay four percent interest on that loan which

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is shown on the income statement here in the two

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million dollars a year of money rental expense A interest

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side note How do you calculate interest Three letters to

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remember p R T principle Times rate times time Get

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that tattooed somewhere but not in your forehead Right Wait

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is there literally a line titled Everything Else Yes there

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is because we're generally lazy as humans and because we

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could find eighty seven other items that bean counters use

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in their income statements We just threw in a line

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called everything else so that if we forgot to add

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something well this is where we dump it Okay Finally

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total expenses Well we find that the total expenses of

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the company in two thousand eighteen were fifty two million

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on sales of forty five million and they lost seven

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million bucks Well in theory the company would pay it's

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thirty two percent tax rate But in America you don't

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pay taxes on losses So the net income was in

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fact seven million of loss and the net margin was

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a negative number which is largely meaningless in context Here

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What Something is odd The company actually generated three million

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dollars in cash profits so how could that have happened

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When it lost seven million dollars in earnings you know

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on its bottom line Well the answer lies in the

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ten million dollars of depreciation taken for that fifty million

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dollar factory it paid for in the previous year The

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ten million dollars is an expense that we uh made

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up Is it possible that the factory could last one

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hundred years like some of the newspaper print mills and

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some of the steel mills in Pittsburgh and a radio

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broadcast tower from a nineteen forty two that still works

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just fine today Yes that's totally possible even probable Yet

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we have to depreciate factory given rate to reflect accounting

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laws And there is the obvious benefit that in depreciating

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the factory aggressively it allows us to show no taxable

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profits so that we save our cash for the future

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Yes someday the featherless chickens will come home to roost

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and we will show massive profits down the line and

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pay big taxes on it But the presumption is that

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we managers will have long retired by then handing over

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the keys of some poor schlub too Then manage that

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big fat tax burden for us Yep passing the buck 00:05:06.275 --> [endTime] is a finally hone seal

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