Question

Q5 to Q6- Use your own words to explain the following items on income statement.

1. Costs of goods sold (COGS)
2. Selling, general, and administrative expenses (SG&A)
3. Depreciation
4. Interest expense
5. EBITDA
6. EBIT (also referred to as operating income)
7. Net income
8. Earnings per share
9. Retained earnings

Answer 1

1. Costs of goods sold (COGS)- It refers to the cost associated directly to the goods sold by the company during the year. It includes direct costs such as material, labour which are disrectly associated with the making of the good from raw material to a finished product that is ready to sell. It is deducted from revenue to formulate gross profit for the year. (COGS)= value of beginning inventory - ending inventory + purchases.
2. Selling, general, and administrative expenses (SG&A)- These refer to the expenses that are not disrectly associated with converting a good into a finished product but are associated with other activities of the company like selling and delivering of the product. Example - advertising, utilities, insurance etc.
3. Depreciation- It refers to an annual decrease in value of a fixed tangible asset. the cost of the asset id distributed omong the working life of a asset and a fixed amount is deducted every year to find the value of the asset on that date. The decrease in value may be caused by several reasons like normal wear and tear, obsolescence, perishability of the asset etc.
4. Interest expense- It refers to the expense related to interest on liabilities of the company. It might be realated to the debentures issued by the company, loan taken by the company etc. Its a fixed annual expense of a company which is deducted in order to reach the net profit for the period.
5. EBITDA- It stands for earning before interest, tax, depreciation and amortisation. It is used to measure corporate performance from its core business activity hence its a measure of profitbility.It hekps in better comparisons of companies because it excludes factors like depreciation , amortisation , interest, tax and focuses more on the profit of a business from its core activity.
6. EBIT (also referred to as operating income)- It stands for earning before interst and tax. It is also a measure ofprofitability of a company from its core operations by eliminating the effect of interest and tax. interest expense depicts the capital structure structure of the company and is irrelevant to take into account while calculating its core operations performance.
7. Net income- Net income refers to the income after taking into account all incomes, gains, expenses and losses. It represent the amount available to the shareholders of the company. dividends are distributed from the net income. Some amount may also be reinvested in the company in the form od retained earnings.
8. Earnings per share- It refers to the amount of net income attributable to each unit of common shares of the company. It depicts the magnitude of wealth maximisation of the company's shareholders.
9. Retained earnings- It is amount taken from net income which is not distributed as dividends to the shareholders. It is reinvested into the company for growth prospects. The company in its initial stages might take out more into retained earnings and pay less dividends and at the initial stages, it needs more capital for its growth. however companies in thir mature stages might pay all the net income as dividends as their is a very little scope for growth hence wealth maximisation of shareholders remain the primary objective of the net inome.