Accounting: Below the Line Expenses
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Courses | Accounting |
Language | English Language |
Transcript
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