Accounting: Below the Line Expenses

The road above the line lives just the basic stuff

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

the lemons the cops and the labour toe Pour the

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

style sheets the feathers and the sewing labor And if

they come with the Bluetooth sleepy time at on well

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

devices as well The cost of all that stuff and

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

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

below the line Expenses refer to more broad attributions of

company expenses that do not necessarily relate on a one

for one basis to the unit sale of products the

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

of the income statement where below the line expenses includes

things like marketing Well marketing in this sense refers to

a few things First it refers to an analysis of

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

killing it for us and Nordstrom is doing terribly Is

Ceres actually where America shops for pillows right Well marketing

in this sense also refers to the spend of dollars

on ads in newspapers radio television billboards the Internet and

paint logos ascribed to the heads of bald men willing

to lease their scalp for five bucks a day All

right moving on Sales costs are a different animal If

marketing is the religion than sales costs are the temples

churches and mosques Yeah Sales costs relate on a much

more direct basest with the sale of product and many

companies include sales costs as an above the line expense

But regardless on our pillow talk income statement note that

both marketing and sales costs go up at a rate

roughly equal to the rate at which revenues have increased

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

more deeply later But just remember for now that the

concept are first to the notion that the company has

spent a lot of money up front toe by something

relatively expensive That asset will slowly decline in value over

time and will need to be replaced Or at the

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

company should it ever be sold As a result company

must show the decrease in value of that asset on

the income statement even though the net total value of

that asset would be carried instead on the balance sheet

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

paying attention This is a difficult concept to grasp Okay

what about office rent Well office rent goes up modestly

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

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

good thing for investors are well The same clearly holds

true for the cost of insurance and lawyers Alright next

line interest will Interest refers to the fact that the

company carries well a fair amount of debt Specifically the

company took out a loan for fifty million dollars and

agreed to pay four percent interest on that loan which

is shown on the income statement here in the two

million dollars a year of money rental expense A interest

side note How do you calculate interest Three letters to

remember p R T principle Times rate times time Get

that tattooed somewhere but not in your forehead Right Wait

is there literally a line titled Everything Else Yes there

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

could find eighty seven other items that bean counters use

in their income statements We just threw in a line

called everything else so that if we forgot to add

something well this is where we dump it Okay Finally

total expenses Well we find that the total expenses of

the company in two thousand eighteen were fifty two million

on sales of forty five million and they lost seven

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

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

pay taxes on losses So the net income was in

fact seven million of loss and the net margin was

a negative number which is largely meaningless in context Here

What Something is odd The company actually generated three million

dollars in cash profits so how could that have happened

When it lost seven million dollars in earnings you know

on its bottom line Well the answer lies in the

ten million dollars of depreciation taken for that fifty million

dollar factory it paid for in the previous year The

ten million dollars is an expense that we uh made

up Is it possible that the factory could last one

hundred years like some of the newspaper print mills and

some of the steel mills in Pittsburgh and a radio

broadcast tower from a nineteen forty two that still works

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

we have to depreciate factory given rate to reflect accounting

laws And there is the obvious benefit that in depreciating

the factory aggressively it allows us to show no taxable

profits so that we save our cash for the future

Yes someday the featherless chickens will come home to roost

and we will show massive profits down the line and

pay big taxes on it But the presumption is that

we managers will have long retired by then handing over

the keys of some poor schlub too Then manage that

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