Income Statement Overview

($ in Thousands)

Income Statement: Lesson Notes:

Revenue:
Online Courses:
Resume/CV Editing and Coaching:
Total Revenue:
Cost of Goods Sold (COGS):
Online Courses:
Resume/CV Editing and Coaching:
Total Cost of Goods Sold (COGS):
Year 1
$ 900 Revenue: Can only recognize it when product/service is actually DELIVERED… but the delivery
100 times here are very short, so there's not much of a delay.
Should be AFTER refunds and returns - so this is "Net" Sales.
50 COGS: These represent the "Per unit" expenses of selling products/services. 100% variable!
50 For physical products, might be cost of materials and shipping for each product.
Services - cost of labor and paying people to deliver 1 "unit" of service.

Gross Profit: Gross Profit: Very important - tells you how much additional potential profit you could make
Online Courses: from each sale… before any fixed expenses like offices, employees, rent, marketing, and so on.
Resume/CV Editing and Coaching: Higher gross profit is almost always better.
Total Gross Profit:
Gross Margin %: <-- This percentage is very high, but typical for software/internet companies.

Operating Expenses:
Sales & Marketing:
Research & Development:
General & Administrative:
Total Operating Expenses:
Operating Expenses: Anything that you CANNOT link directly to individual units sold, such as
300 paying for people to create the products/services, paying for rent, paying for advertising
250 campaigns, customer support, office supplies, utilities, insurance, accounting services, etc.
150
Operating Expenses are mostly fixed, but there are some variable costs as well.

Operating Income: "How much did we earn from our core business, before taxes, side activities, and interest?"
Operating Margin: <-- Fairly standard margin, maybe even a bit low for software/internet.

Other Income / (Expenses): - <-- Anything miscellaneous, like side businesses, other revenue streams, etc.
Interest Income / (Expense): - <-- $0 for now because we have no debt and are earning no interest on cash.

Pre-Tax Income: <-- Sort of like your "Adjusted Gross Income" when filing taxes - when you submit your
taxes, the actual number that the taxes are based on. Assuming a ~25% rate, in-line
Income Taxes: with most U.S. companies as of 2020.

Net Income (Profit After Taxes): "The bottom-line": how much did this business really generate after taxes and expenses?
Net Income Margin: <-- Fairly high margin in most industries, but not unusual for software/online.

Assets and Liabilities & Equity:

Assets:
Cash: $ 1,000
Total Assets: $ 1,000 <-- In this case, Net Income would add to this Cash balance each year…
(Since Net Income = what we really earn in cash, at least for right now.)
Liabilities & Equity:
Debt: $ -
Equity (Capital we've contributed): 1,000
Total Liabilities & Equity: $ 1,000 <-- And then Net Income would also add to this item on the other side, because
we're retaining this capital and not doing anything with it - saving up for something
in the future or for future growth.
Income Statement - Key Points and Assumptions:

Revenue, expenses, and taxes over a PERIOD of time (1 year, 1 quarter, 1 month, etc.).

Net Sales at the top all the way down to After-Tax Profits at the bottom.

Often, you break revenue and expenses into different categories, as we do

here - exact split depends on the industry, company size, etc.

To appear on the Income Statement, an item must:

1) Correspond 100% to the period shown - So, if we deliver a product in Year 2,

we can't include that as Revenue in Year 2.

We can include payments to employees for their work THIS YEAR.

But if we buy a factory, that factory will be useful for many years, so the initial
spending on it will NOT show up on the IS.

The "after-effects" of buying that factory will show up on the IS - covered in later
lessons - but NOT the initial spending.

2) Affect the business income available to common shareholders (Net Income

in this example) - The IS tracks the amount that's available to the "shareholders,"
i.e., the owners of the business. If something doesn't affect that number, it can't
appear on the IS.

(We'll get into this distinction more later on - for now, just keep in mind the idea.)

Our Assumptions Here:

All products/services are delivered right away, or at least very quickly - so we can
recognize revenue right away, or very close to it.

All revenue comes to us in cash, upfront, for the products and services.

Expenses are also paid out in cash at exactly the time they are incurred - for example,
online advertising is paid for right away as we use it.

For this type of company, accounting is VERY simple - the Net Income at the bottom IS
the cash flow that the business generates, or extremely close to it.

And if you're analyzing a company this simple, you don't need to go too far beyond this -
maybe track Cash, Debt, and Equity separately, but that's about all you need to do.

Of course, in real life it's not this simple… so we're going to look at how and why this gets
more complicated in the next lessons.