Income Statement: EBITDA, Net Income

Video #4

Transcript

Welcome back to the income statement. While you were gone, I just rewrote this and shortened some of the long words:

  • Cost of goods sold has now become COGS and that’s how people would pronounce it
  • General and administrative is now G&A
  • Research and development is now R&D
  • Sales and marketing is now S&M

It just cleans it up a little bit.

You know that this ($7,500) is called gross profit. Gross profit minus the total of the expenses is equal to this subtotal here ($1,500), which has, as I mentioned last time, the longest name of a subtotal in the history of financial statements. I can’t even write it out so I’ll give you the abbreviation, which is EBITDA and that stands for “earnings before interest, taxes, depreciation and amortization.” And this represents your operational profitability — the profitability of your operations. If this number here is positive, you’re making money; you’re profitable. And if this number is negative, it means that for this period of time, you’ve suffered a loss and you’re not profitable.

And, as the name suggests, earnings before interest, taxes, depreciation and amortization, this gap here is going to be filled with interest, taxes, depreciation and amortization. Let me show you. If you’re depreciating any assets this month—you should talk to your accountant about this—you’ll put a value here; let’s say no. If you’re paying any interest on a bank loan, you can put the interest amount here; let’s say that you paid $100 to the bank. And, if you are paying any income taxes in this particular period, you would put this here; let’s say no. Then you simply subtotal that; you simply take the $1,500 less the depreciation, interest and income taxes and you come up with a new subtotal which is $1,400. Then, of course, you double-underline it, which means you’ve come to the end of the financial statement and you’re done.

Well, congratulations, the income statement is done. One down, two to go.

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