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Accounting: Below the Line Expenses 0 Views
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Transcript
- 00:00
Accounting Allah shmoop below the line expenses Okay everybody take
- 00:07
a deep breath and pinch your nose We're going below
- 00:10
the line All right here's line This was life above
- 00:13
the line And here is life below the line Yeah
- 00:16
the line Well it's where gross profits of production hit
Full Transcript
- 00:19
The road above the line lives just the basic stuff
- 00:23
to make the product like for the lemonade stand it's
- 00:25
the lemons the cops and the labour toe Pour the
- 00:28
end result Or for pillow talk Well it's the clan
- 00:32
style sheets the feathers and the sewing labor And if
- 00:35
they come with the Bluetooth sleepy time at on well
- 00:38
then it's a speakers and IO devices or input output
- 00:41
devices as well The cost of all that stuff and
- 00:44
the cost of sewing it in there Yeah that's it
- 00:46
All above the line It's above to make the product
- 00:49
below the line Expenses refer to more broad attributions of
- 00:53
company expenses that do not necessarily relate on a one
- 00:57
for one basis to the unit sale of products the
- 00:59
company is creating Let's take another look at that part
- 01:02
of the income statement where below the line expenses includes
- 01:06
things like marketing Well marketing in this sense refers to
- 01:09
a few things First it refers to an analysis of
- 01:12
the numbers What venues are selling our pillows is Macy's
- 01:16
killing it for us and Nordstrom is doing terribly Is
- 01:19
Ceres actually where America shops for pillows right Well marketing
- 01:24
in this sense also refers to the spend of dollars
- 01:27
on ads in newspapers radio television billboards the Internet and
- 01:32
paint logos ascribed to the heads of bald men willing
- 01:34
to lease their scalp for five bucks a day All
- 01:37
right moving on Sales costs are a different animal If
- 01:39
marketing is the religion than sales costs are the temples
- 01:43
churches and mosques Yeah Sales costs relate on a much
- 01:46
more direct basest with the sale of product and many
- 01:49
companies include sales costs as an above the line expense
- 01:52
But regardless on our pillow talk income statement note that
- 01:55
both marketing and sales costs go up at a rate
- 01:58
roughly equal to the rate at which revenues have increased
- 02:01
OK next up depreciation and amortization Alright we'll delve much
- 02:05
more deeply later But just remember for now that the
- 02:08
concept are first to the notion that the company has
- 02:10
spent a lot of money up front toe by something
- 02:12
relatively expensive That asset will slowly decline in value over
- 02:17
time and will need to be replaced Or at the
- 02:20
very least we'll be less of an asset to the
- 02:22
company should it ever be sold As a result company
- 02:24
must show the decrease in value of that asset on
- 02:26
the income statement even though the net total value of
- 02:29
that asset would be carried instead on the balance sheet
- 02:33
Right If this confusing that's good news It means you're
- 02:35
paying attention This is a difficult concept to grasp Okay
- 02:39
what about office rent Well office rent goes up modestly
- 02:42
over time and it reflects the company's ability to sell
- 02:45
more pillows without hiring very many new people That's a
- 02:47
good thing for investors are well The same clearly holds
- 02:50
true for the cost of insurance and lawyers Alright next
- 02:53
line interest will Interest refers to the fact that the
- 02:56
company carries well a fair amount of debt Specifically the
- 02:59
company took out a loan for fifty million dollars and
- 03:01
agreed to pay four percent interest on that loan which
- 03:04
is shown on the income statement here in the two
- 03:07
million dollars a year of money rental expense A interest
- 03:10
side note How do you calculate interest Three letters to
- 03:14
remember p R T principle Times rate times time Get
- 03:18
that tattooed somewhere but not in your forehead Right Wait
- 03:21
is there literally a line titled Everything Else Yes there
- 03:25
is because we're generally lazy as humans and because we
- 03:28
could find eighty seven other items that bean counters use
- 03:30
in their income statements We just threw in a line
- 03:32
called everything else so that if we forgot to add
- 03:35
something well this is where we dump it Okay Finally
- 03:38
total expenses Well we find that the total expenses of
- 03:40
the company in two thousand eighteen were fifty two million
- 03:43
on sales of forty five million and they lost seven
- 03:45
million bucks Well in theory the company would pay it's
- 03:48
thirty two percent tax rate But in America you don't
- 03:50
pay taxes on losses So the net income was in
- 03:53
fact seven million of loss and the net margin was
- 03:57
a negative number which is largely meaningless in context Here
- 04:00
What Something is odd The company actually generated three million
- 04:04
dollars in cash profits so how could that have happened
- 04:07
When it lost seven million dollars in earnings you know
- 04:10
on its bottom line Well the answer lies in the
- 04:12
ten million dollars of depreciation taken for that fifty million
- 04:16
dollar factory it paid for in the previous year The
- 04:19
ten million dollars is an expense that we uh made
- 04:22
up Is it possible that the factory could last one
- 04:25
hundred years like some of the newspaper print mills and
- 04:27
some of the steel mills in Pittsburgh and a radio
- 04:30
broadcast tower from a nineteen forty two that still works
- 04:33
just fine today Yes that's totally possible even probable Yet
- 04:36
we have to depreciate factory given rate to reflect accounting
- 04:40
laws And there is the obvious benefit that in depreciating
- 04:43
the factory aggressively it allows us to show no taxable
- 04:46
profits so that we save our cash for the future
- 04:49
Yes someday the featherless chickens will come home to roost
- 04:51
and we will show massive profits down the line and
- 04:54
pay big taxes on it But the presumption is that
- 04:57
we managers will have long retired by then handing over
- 05:00
the keys of some poor schlub too Then manage that
- 05:03
big fat tax burden for us Yep passing the buck 00:05:06.275 --> [endTime] is a finally hone seal
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