Income Statement Explanation
A free video tutorial from Chris Haroun
Award Winning MBA Professor, Venture Capitalist and Author.
4.5 instructor rating • 36 courses • 910,503 students
An explanation of the income statement (assumes you have no experience with this topic).
Learn more from the full courseIntroduction to Finance, Accounting, Modeling and Valuation
Learn Finance & Accounting from Scratch by an Award Winning MBA Professor, Ivy Grad, worked @ Goldman & VC
04:20:39 of on-demand video • Updated September 2020
- #1 Best Selling Accounting Course on Udemy (Learn Finance and Accounting the Easy Way)!
- Analyze and understand an income statement (even if you have no experience with income statements).
- Analyze and understand a balance sheet (even if you have no experience with balance sheets).
- Analyze and understand a cash flow statement (even if you have no experience with cash flow statements).
- Understand and use modeling best practices so you can create financial models.
- Know where to get data in order to build a financial model (in depth understanding of identifying and using/navigating the best free websites and sources to build your financial model)!
- Create a financial model (projecting the future) for an income statement.
- Create a financial model (projecting the future) for a balance sheet.
- Create a financial model (projecting the future) for a cash flow statement.
- Understand valuation best practices so you can create target prices based on your financial models.
- How to use Discounted Cash Flow (DCF) and how to create the Weighted Average Cost of Capital and Terminal values in order to pick target prices.
- How to use P/E in order to pick target prices.
- How to use P/R in order to pick target prices.
- Other valuation methodologies, including EV/Sales, EV/EBITDA, P/B, EV/FCF, etc.
- Come up with a target price based on an average of several different valuation methodologies.
- Analyze the total addressable market for a company you are doing research on.
- Analyze financial statements using profitability ratios: Gross Margin (Cost of Goods Sold / Revenue), Operating Margin (EBITDA/ Revenue), Net Profit Margin (Net Income / Revenue), Return on Assets (Net Income / Assets) and Return on Equity (Net Income / Equity).
- Analyze financial statements using debt and inventory formulas: Debt to Assets (Total Liabilities/ Total Assets), Debt to Equity (Total Liabilities/ Total Equity), Interest Coverage Ratio (EBITDA / Interest) and Inventory Days on Hand (Inventory / Cost of Good Sold) * 365.
- Analyze and compare companies using the following formulas: Price / Earnings, PEG (P/E / Growth), Price / Revenue, EV/EBITDA, EV/Sales, Price/Free Cash Flow and Price / Book.
- We will do an extremely in depth professional accounting, finance, modeling and valuation analysis of LinkedIn using the accounting and finance methodologies used in this course (you will also have many exercises to complete that will help you understand accounting, finance, valuation and modeling).
English -: Let's discuss the income statement in more detail. An income statement will tell you how much money is coming in to you. Okay? And that's called revenue or sales, which is the same thing. And some people call it the top line because revenue goes at the top of the income statement. And the bottom line. What is our bottom line? That's net income at the very bottom. Okay? And it also tells you money out. Okay? And revenue or money in, minus money out or expenses, equals net income. Pretty simple. Great. So let's drill down a little further. Okay? And we're gonna talk about an example here. You have a company and you sell apples. Okay? And you sell them for $2 each and that's a Canadian 2 dollar coin . It's a polar bear. Pretty cool. Okay? So you selling an apple for $2 each. Okay? And you sold six apples. Okay? So that's $12 in revenue. Now in terms of expenses, it costs you a buck to make one apple. Okay? That's a Canadian $1 bill. We call it a loonie. Represent, I'm Canadian here. Okay? So it costs us a buck each to make an apple. Right? And we made six apples. And so the cost of goods sold, right? Is six bucks. Okay? So revenue minus expenses, right? Equals the cost... Revenue minus the cost of goods sold, right? Equals your gross profit. Okay? Okay, let's move on. And then we have labor, right? You work in this great company and you made a buck. Okay? And there's another expense called depreciation. Okay? And this is a beautiful thing, but it's not cash out of your pocket. Let me drill down. Explain in more detail. Okay. So you buy a truck, right? Your truck is gonna last you for 10 years, you paid 10 bucks for it. Right? And so every year you're allowed to depreciate that truck. Okay? There's wear and tear on it. And basically that means that you're gonna to pay less tax. And this all makes sense in a second. Okay? So over 10 years we get to write off 10 bucks. Okay? A buck this year. Okay? And then we get a buck next year, yadi, yadi, yada. Rinse, lather, (indistinct) you get it. 10 bucks. Cool. And so that is depreciation. Okay? And it's a beautiful thing because what we're gonna do now is calculate taxes. And we're gonna pay a little bit less tax. If we didn't appreciate this truck, we'd pay more tax. Right? Okay. So what is our tax going to be? Well, our pretax net income is four bucks. 12 minus six, minus one, minus one, four bucks. We're gonna get taxed on that four bucks now. Okay? And if we didn't... And we pay a buck in taxes, which is say, 25%. Let's pretend that the tax rate is 25%. If we didn't depreciate that $1, right? For the truck, then we would have paid taxes on five bucks. Right? Which means that we would have paid more in taxes. Okay. So now net income is three bucks. Now let's take a closer look, revenue, (indistinct), okay? Revenue is what we're gonna spend a huge amount of time on, in this course. It's more important than any other line item on any financial statement. And the reason is that once you forecast revenue, everything else in your financial models, pretty much, is just a percent of revenue. Okay? And this will make a lot of sense to you when we do the modeling section of the course. So the top line is 12 and the bottom line is three.