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Accounting: Income Statement Intro 5 Views


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Description:

Find out what GAAP accounting means and may the force be with you.

Language:
English Language

Transcript

00:00

Accounting Allah shmoop Income statement in a nutshell Think oven

00:07

income statement as a report card Yeah you said that

00:11

before covering a period of time like a quarter or

00:14

a year it's usually how they do it All right

00:16

well we're going to make up a little company Here

00:19

are little drone company Yeah Eyes in the skies What

00:22

we'll call it Well it sells five hundred thousand drones

00:24

at an average selling price of two hundred bucks each

00:27

They sell at retail for three hundred ninety nine dollars

00:30

But these air being sold toe Amazon and a big

00:32

discount because Amazon can move massive volumes of drones So

00:36

we sell the Amazon for two hundred bucks each They

00:39

have sales of one hundred million dollars total and all

00:41

of these sales happen and are recognized over the period

00:44

from January one to March thirty one You'd say that

00:48

the company had revenues of one hundred million dollars in

00:51

the first quarter and then the company will have also

00:53

had expenses Yet they had to pay for the build

00:56

of those drones the batteries that controller units the plastic

00:59

form factors that house everything the human labour to assemble

01:03

the drones the blades and so on so on Well

01:05

they also had marketing and legal and insurance and office

01:08

paper clips to pay for If they added everything up

01:11

well they may have had Satan eighty million dollars in

01:14

expenses that quarter Well they can then calculate what is

01:17

called operating profit or profit from their operating of the

01:21

business which is also called pretax profit In this case

01:25

while that Numbers 20000000 bucks to get net profit or

01:28

net income or earnings while the company has to then

01:32

account for taxes which are saved thirty percent or in

01:35

this period the company allocates in about six million dollars

01:38

for taxes there too then show net income of fourteen

01:41

million bucks That's fourteen billion dollars of net income on

01:45

sales of one hundred million dollars And yes we're oversimplifying

01:48

this a lot just for the sake of clarity here

01:51

So why do we need an income statement anyway Well

01:53

a few key reasons The income statement is generally the

01:56

base document from which we figure out how much we

01:59

owe in Tax says if we don't know what we

02:01

all well and the government can't waste our money candidate

02:04

and they really like Tio spend our money well The

02:08

income statement tells investors how well the company is doing

02:11

Most investors invest to have profit If they don't get

02:15

them they do this well The income statement gives us

02:18

a benchmark to meet her how well or poorly management

02:21

is doing versus its competition And it's past If every

02:25

other drone company is growing at thirty percent a year

02:28

and we're growing at one hundred percent a year well

02:30

then we're crashing it But maybe the other drone companies

02:33

are wildly profitable and we're still burning money Well then

02:36

we're really not doing so well Or are we Maybe

02:40

maybe not but we don't know yet But the income

02:42

statement is the document that explains in numbers the truth

02:45

around our financial performance All right moving on the income

02:48

statement also helps us to run our company If we

02:51

note that all of a sudden our cost of plastic

02:54

housing ballooned last quarter to be up one hundred eighty

02:57

seven percent when our production units increased just fifty eight

03:01

percent we'd want to start asking a whole lot of

03:03

questions Why did the costs balloon Was it a petroleum

03:07

shortage that made plastic really expensive and costs inflated Was

03:11

there an accident at the factory or did Labour suddenly

03:14

unionize And maybe we should look at saving those costs

03:17

and start assembling the drones in Mexico or China That

03:20

is The income statement helps us ss our own internal

03:24

financial metrics To be sure we're running the company at

03:27

optimal levels This income statement example covers the last quarter

03:31

but we could apply the same structure to the results

03:34

for last year in an annual income statement report which

03:38

is filed with the government as yes eight Ten K

03:40

All right well we've barely touched on the finer points

03:42

of gaff accounting and all we will will bore the

03:45

crap out of you doing all that in the above

03:47

Example there were no nuances no money back guarantees no

03:51

credit risk no accounting for the hundred million dollar battery

03:54

making factory we just built For now we're keeping it

03:57

simple ish Just enjoy the simplicity for the next few

04:01

minutes while it lasted it won't be here long

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