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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.
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
Full Transcript
- 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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