Question

define the following terms and describe in a paragraph how they are used for in an income statement to analyze the company's financial position.

Revenue

COGS

Gross Profit

SG&A

EBITDA

Depreciation

Interest

EBT

Taxes

Net Income

Answer 1

Revenue

Revenue is the income generated by firm. It includes sales and service revenue and other income like interest income, dividend income, etc

COGS

Cost of goods sold is the cost relating to goods sold during the year. It is computed based on opening stock plus purchases less closing stock.

Gross profit

The difference between Sales and cost of goods sold is gross profit.

SG & A

The selling, general and administrative expenses are the operating expense of the firm in day to day running and management of operations of the firm. For example: office salaries, advertising expense, rent expense, utliities, insurance, etc

EBITDA

The gross profit less operating expenses gives Earnings before interest, tax, depreciation and amortization.

Depreciation

Depreciation is charge of assets usage to income statement based on estimated life of asset. For example: depreciation of buildings, furniture, and equipment

Interest

Interest is charge on borrowed money for investment in the firm. For example: interest paid on bonds payable, debentures, long term notes payable

EBT

Earnings before tax is the earnings after depreciation and interest but before taxes are paid

Taxes

Taxes are the income tax expense accounted based on prevailing income tax rates on the taxable income.

Net income

Net income is the final income available after payment of taxes .It can be paid as dividend or transferred to Retained earnings

Analysis of Income Statement:

The income statement is used to analyse the profitablity of the firm. The profitablity ratios used to analyse the financial position are gross profit margin, operating margin and net profit margin. A profitablity ratio is key to the firm since it generates internal accruals and helps in declaration of dividends to shareholders. It helps in calculating earnings per share and return on assets and return on stockholders’ equity. Net income also helps in generation of cash flow from operating activities. A cash flow from operating activities helps in investing activities like purchase of fixed assets and financing activities like repayment of loan and payment of dividend.