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Accounting Allah shmoop income Statement two point Oh time Tio

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Simplify simplify throw Remember Okay let's go back to our

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little lemonade stand that could and drill into some of

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the more difficult elements of the income statement It's this

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thing right here Think about our big Zen question First

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addressed by Moses at the burning bush He asked God

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when our revenues revenues and God said Don't be a

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smart ass get back to helping me smite All right

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well it was a start Anyway When a customer comes

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to just freakin lemons and pays you the dollar for

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their lemonade they drink it and say Boy howdy that

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was good And then they walk away Well that constitutes

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a clean sale We're going to assume that thirty minutes

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later they aren't throwing up from you know food poisoning

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in coming back to Syria And even if they did

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while the cost of defending yourself wouldn't be a revenue

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related item on the income statement it'd be in a

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new category You just realized you need called a legal

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and insurance and stuff All right Yeah Usually those two

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items get lumped together in smaller companies because well insurance

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people are for the most part either lawyers or law

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school dropouts So clean sale makes for clean revenues The

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sale is clear In this case it's in cash The

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amounts are clear in this case one hundred cents on

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the dollar and there's no credit or refund risk so

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that's clean But when our revenues you know dirty well

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revenues are quote dirty unquote when a sale may or

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may not actually have happened or at least bi deemed

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to not have happened by accounting standards or that the

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amount being sold is vague That is there is no

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certainty of revenues What then comprises riel certainty Well you

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could posit that when cash goes into your Viva coffers

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that's a sale But what if there's a three month

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money back guarantee Don't you have to have a reserve

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for the number of people who will exercise their right

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to that money back Guarantee Oh you betcha And how

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do you do that Well in the beginning different in

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the beginning You really have no history So you essentially

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make all revenues deferred IAEA put off to be accounted

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for it A later date deferred revenues Yep That's a

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new category you'll see it a lot and as soon

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as the ninety days are off then you can call

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them revenues They get promoted from just deferred to being

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you know just revenues But over time you'll notice patterns

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that are probably pretty stable That is if you have

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one percent of your revenues pretty steadily being redeemed for

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the money back guarantee Well then you can start to

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reserve way less than one hundred percent you started with

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And it's rational that in a given month if you

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took in a million bucks you reserve a ten grand

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for that guarantee system right That kind of makes sense

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one percent there Why would you have started with one

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hundred percent reserves instead of just guessing and maybe even

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quote being conservative unquote and reserving five percent thinking you'd

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covered likely the returns five times over Why Why Gap

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Remember the God of Gap hallowed be thy name It

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tells you that you must do the most rationally conservative

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thing that you can do when accounting for money And

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since you were just starting a business you had no

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idea if the product was going to end up poisoning

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Everyone within a twenty five square mile radius or turn

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out to be something really good where one percent or

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less was ever redeemed for a refund Okay so that's

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the quick and dirty on you know dirty revenues But

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what about the credit card issue How do credit card

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sales affect revenues or the revenue line on the income

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statement Well as you'd guess credit card companies take a

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fair chunk out of your purchases In this example let's

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say they take three percent of sales Is there fee

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for underwriting the risk in hassle and grief of deadbeats

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not paying on the credit card debts they owe on

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a million bucks of sales You pay Visa MasterCard Amex

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whoever about thirty grand and you keep nine hundred seventy

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grand So do you book revenues as a million dollars

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Or is nine seventy Answer a million Why Well this

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isn't the most conservative number is it Doesn't it overstate

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what really revenues to you were Why wouldn't you claim

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revenues at nine hundred seventy thousand dollars instead of goose

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ing them up to be a million Well because credit

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cards are a very common way of doing business in

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theory Everyone in the fruit juice industry uses them and

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it's fair to assume that well a very large part

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of revenues will be ade via credit card Toe lemonade

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stands When standard practice dictates a certain set of costs

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that are common to an industry You adopt the most

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common methods of Aki counting in that industry In this

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case common practice is to round up the number and

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then also produce a line like a credit card costs

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or merchant service costs or something like that which then

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gives better clarity as to the composition of how you

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got from nowhere to that nine hundred seventy thousand figure

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Okay so what about uncertain revenues Well here's another twist

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What if revenues are suspect or uncertain as to being

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paid like supposed Just freakin lemons was hired to serve

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a million cups of your stellar product there Yeah that

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stuff at this year's Super Bowl Well hypothetically in this

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instance if there is a risk that you won't in

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fact be aid for your million Cups eliminate should you

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still book the million dollars the NFL promised to you

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as revenues No of course you should not You do

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still suffer the expenses of having had to produce and

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deliver it however and you're still liable if people get

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sick from it Even if you never get paid by

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the NFL Maybe think about that potential nightmare When you

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negotiate your next contract I eat that they pay you

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X percent up front so that if they do re

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nigga on the deal well you've at least collected enough

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cash up front to cover your cups Well the hard

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part here is figuring out what to deduct for risk

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of non payment Is the NFL going bankrupt anytime soon

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No not likely They've already paid Aaron Rodgers Do they

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have a history of not paying their vendor bills No

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Well they claim non performance on your Part III that

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you didn't actually deliver the million Cups of lemonade Also

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not likely because you're the one who's got to deliver

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him Well do they have a history of sub charging

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you that is claiming that the cups you brought left

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a mess on the floor that you were supposed to

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have been the one providing the cleaning people for him

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and well at least your own trash cans that now

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they had to clean up the sticky mess and deal

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with the ants Yeah so they charge you for that

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Uh you have a history of that We'll know All

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right well so instead then of paying you the million

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you thought they would they're going to deduct fifty grand

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to clean up and just pay you nine fifty That

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how that works And maybe we'll all of these factors

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play into how you calculate revenues No hard and fast

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numbers are embedded here You just need to demonstrate that

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you thought about it rationally OK next question Why would

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someone want to state revenues as being really low And

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why would the regulators not be okay with that Well

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revenues being stated as overly conservatively lo have a big

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effect on one particular line item on the income statement

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All else being held equal Want to guess which one

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Yeah Rhymes with Smacks is if you had expenses of

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four hundred grand in revenues of a million bucks you'd

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have pre tax profits of six hundred thousand dollars and

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you pay your thirty percent tax of one hundred eighty

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grand to net for twenty and earnings there But if

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you somehow came up with a rental guarantee of the

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lemonade with the notion that you know nobody really dies

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Lemonade They just rented right and then you were somehow

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able to defer those revenues to be recognized some years

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later Well then maybe you can show only five hundred

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thousand dollars in revenues instead of that million this year

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You still have the four hundred grand expenses Nothing else

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changed They're not even sales commissions to your reps So

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you'd show just one hundred thousand dollars in profits Pay

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your thirty percent tax there and you'd have paid thirty

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thousand in taxes instead of the one hundred eighty thousand

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you paid Before that Wilkie idea here you still collected

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the full million dollars in revenues in cash there It's

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sitting in your bank account and then yeah you subtract

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credit card fees or whatever else you're just not recognizing

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it yet As clean revenues it's Ah legal chiquet Nery

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book cooking and other falsities when you go to these

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lengths to be conservative So if you do find yourself

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being encouraged Teo do illegal things and snarf around the

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edges by your CEO or whoever to do your accounting

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Like this Either get another gig fast or think about

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whether on your body stripes would be slimming Uh

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