Income Statement Reading, Interpretation & Analysis For Investors and Business Owners | Chris Benjamin | Skillshare

Income Statement Reading, Interpretation & Analysis For Investors and Business Owners

Chris Benjamin, Instructor, MBA and CFO

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20 Lessons (49m)
    • 1. Course Introduction

      1:19
    • 2. Instructor Introduction

      2:30
    • 3. Overview and What To Know Introduction

      2:01
    • 4. Revenue

      2:39
    • 5. COGS

      3:43
    • 6. G and A

      2:21
    • 7. Selling Expenses

      2:27
    • 8. Other Income and Expense

      2:23
    • 9. Introduction to Tips and Strategies

      1:15
    • 10. Income Statement Comparisons

      3:33
    • 11. Slice The Income Statement

      2:35
    • 12. Relate Income Statement to Other Statements

      2:36
    • 13. Income Statement Related to Cash Flow

      1:26
    • 14. Ratio Analysis

      3:06
    • 15. Dos and Donts

      4:34
    • 16. Case Study 1 Growing Private Company

      1:30
    • 17. Private Health Company Going Public

      1:44
    • 18. Publicly Traded Tech Company

      1:15
    • 19. 10 Point Checklist

      4:04
    • 20. Course Conclusion

      2:21

About This Class

Are You A Executive, CFO, CEO or Board Member?

Are You An Entrepreneur or Business Owner?

Have You Ever Wanted To Truly Understand And Interpret An Income Statement Beyond The Basics?

Do You Want To Take Your Knowledge of the Income Statement Beyond The Basics?

If You Answered "Yes" To Any Of The Above, Look No Further.  This Is The Course For You!

Enroll today and join the 100,000+ successful students I have taught as a Top Rated instructor!

Three reasons to TAKE THIS COURSE right now:

  1. You get lifetime access to lectures, including all new lectures, assignments, quizzes and downloads

  2. You can ask me questions and see me respond to every single one of them thoroughly! 

  3. You will are being taught by a professional with a proven track record of success!

  4. Bonus Reason: Udemy has a 100% refund policy - no questions asked and no risk for you!

Recent Review: 

Alfred A says "Great course, exactly what I needed.  Sure it's easy enough to look at an income statement and see if a company made a profit or loss at the bottom, but how to actually use all the information contained in the report was beyond me.  Now I know how to line by line read, understand and actually interpret how the business performed.  I feel like my knowledge increased 10 times."

Unlock The Secrets Of Actually Understanding The Income Statement and Understanding A Business

As a business owner, investor, accountant or potential investor, it is important to understand how to read and interpret an income statement.  Often people just look at the bottom line to see if a company is profitable, but ignore the details and wealth of information included in an income statement.

Become a income statement analysis pro with this course!

In this course we first cover all of the sections of an income statement and describe what information is included and WHY.  Secondly, we go through and learn the best practices for now analyzing and interpreting that information.  Learn about ratio analysis, comparative analysis to other years, divisions, geographies and companies.  We go through several do's and don'ts related to income statement and financial statement analysis, as well as my top tips and strategies.

What We Do In The Course:  

  • Learn income statement terminology

  • Understand each section of the income statement and what is included and why

  • Learn key financial ratio analysis metrics that you should be applying to income statements

  • Learn the importance of comparing to other periods, other divisions, geographies and more

  • Review 3 case studies and how financial analysis related to them

  • And Much More!!!

At any point if you have a question, please feel free to ask through the course forum, I'd be happy to answer any and all questions.  

***JOIN NOW AND LEARN EVERYTHING ABOUT INCOME STATEMENTS IMMEDIATELY! ***

About The Instructor

Chris Benjamin, MBA & CFO is a seasoned professional with over 20 years experience in accounting, finance, income statement preparation and analysis.  Having spent the first 10 years of my career in corporate settings with both large and small companies, I learned a lot about the accounting process, managing accounting departments, financial reporting, external reporting to board of directors and the Securities and Exchange Commission, and working with external auditors.  

The following 10+ years I decided to go into CFO Consulting, working with growing companies and bringing CFO level experience to companies.  I help implement proper best business practices in accounting and finance, consult on implementation of accounting systems, implementing accounting procedures, while also still fulfilling the CFO roll for many of my clients which includes financial reporting, auditing, working with investors, financial analysis and much more.  

Thank you for signing up for this course. I look forward to being your instructor for this course and many more!

Chris Benjamin, Instructor, CFO & MBA

Transcripts

1. Course Introduction: Hello, everybody. And thanks for signing up for the course, interpreting and analyzing your end income statements. My name is Chris Ben Dream of a CFO and an M B A. In the next video lecture, I'll give yourselves a little bit more of an introduction to me and my background and where I come from and why I'm most of all qualified to teach on this course, but for now, I just want to give you an overview of what will be covering. So first of all, we're going to start off going through an income statement, section by section, looking at the revenues, the cost of goods, sold, the different types of expenses and that income and really picking out. You know, what are the key indicators you should be looking at in each of those sections as it comes to analyze of them? I think a lot of times is business owners. It's easy to print, often income statement. Look at the bottom line, see if you made money and that's all that's really looked at. Maybe do some comparison to the previous year, but really, there's so much knowledge that you could be mining from your income statement and that you definitely should be at your end. And then you can use that knowledge in your planning and budgeting forecasting for the following years to come. So that's where I want to get you to. I want you to learn all those tools and tricks, so go through an income statement and then I will give you, as well some sort tips and strategies on other ways to use the information to better grow your business. So that said, Let's go ahead and get started. We'll do my introduction of myself in the next video, and then we'll start on the course. 2. Instructor Introduction: Okay, so just a little bit more about me. Your instructor Some again. My name is Chris Benjamin. Um, I'm a CFO, which is the chief financial officer and also an MBA. Have an MBA degree from the University of Washington. Ah, where I focused on entrepreneurship as well. Before that, I gotta be an undergraduate degree where I focused in accounting and finance. I have over 20 years experience. I've worked with large publicly traded companies all the way down to smaller early stage seed stage companies. Ah filled the CFL role in many different industries and companies sizes. So I've definitely worked with a lot of companies, and I've seen a lot of different ways of doing sort of financial presentation and analysis . So the most recent 10 years, I basically left the corporate world, and I went into consulting in a room part time CFO, where I go into companies and really help them grow. I'm bringing all that knowledge and experience I had and helping companies that are just growing and making sure they do things right from the start and teaching them there valuable lessons, like, how do you properly, you know, put together an accounting system and and account for different transactions. And then, as it relates to this course, how do you read those financial statements and what can you do with those? And how do you add value to your company by using that insight to plan ahead? So I worked with close to 100 companies, probably more honestly at this point in various capacities. So whether it was sort of on ongoing CFO role, sometimes I end up staying for a couple of years and helping companies out. Sometimes it's one time projects I'm called in to help create a financial forecast where, coincidentally, underlying a lot of information from the previous income statements do things like valuations or just general startup consulting. You know, maybe they need to know how to best structure their business or how to expand globally. So those are all things that have helped companies with. So it's been a terrific career. And now I'm happy to also be teaching courses online as well, in passing that knowledge on to you guys and then as the last point here, and brought companies from seed stage Typo So if you're not familiar, I p. O. Is initial public offering. That's when a company goes from private to public and traded on the stock market. And I've been with companies where I was literally the second employee. It was me and the founder, and four years later we were taking the company public, and obviously at that point we had a lot more staff and and funding and what not? But through that process you work a lot with auditors, with Securities Exchange Commission and and pretty much every position I've ever had. I've had my hands on a financial statement, both income statements and balance sheets. So I've definitely done a lot of analysis and interpretation, and that's what we're going to get to in this course. So that said, let's go ahead and get started on the course content. 3. Overview and What To Know Introduction: Okay, so first of all, just an overview to kind of set the tone for the course, and then on the next slide, we're gonna look at what we're gonna be covering in the first half of the course. So So, first of all, how a company generates revenues and curs expenses and the course of business are shown on the income statement. So this course is really geared towards people who maybe have a sense of what an income statement is. You've looked at it, but you don't really fully understand what the income statement is. I'm so primarily financial statements are looked at executives before others. So you you know and I have a wide audience. So you might be the executive taking this course. You might be the person preparing the financial statement. Or maybe you're the outsider who gets it after the factor. An investor in the company. So typically, these financial statements, though, are, you know, reviewed by your accounting department, um then reviewed by the executive staff and it questions or asked, any changes are made that need to be made. And then by the time it gets in the hands of the investors has been fully vetted. So lastly, the numbers don't lie, but they can be interpreted different ways. So you know you could hand five different people the same income statement, and they would have different views on it, depending on their frame of reference. Maybe one person compares it to the previous year and goes, Oh, great. The company's doing better. Maybe another person doesn't compare to the previous year and they just go Well, I was hoping the company would have made more money. So definitely depends on how you interpret it. And that's we're going to try to give you the tools to do the best interpretation you possibly can of a company's income statement. So basically the next five video lectures we're gonna be going essentially section by section on the income statement. We're gonna talk about the revenue section first, then we'll go into cost of goods sold in services. Thirdly will go into general administrative expenses, fourth selling and then, lastly, other income and expense. So we'll take a look at each of these sections. What's included? What's the best sort of policy procedures and strategies when looking and interpreting the numbers in each of the sections on the income statement 4. Revenue: So let's talk about revenue first. So first of all income statement and most financials typically have a general flow and, ah, layout that they all follow. So on any income statement, your revenue section will typically be first. Once in a while, you see a company that maybe mixes it up. But in general, I think you're safe to say 95% of companies will start with the revenue slash sales. So so what is revenue? First of all, it's indicator of earnings quality. So you know how much money is the company bringing in? It's not their net income, and we'll get to that later. It's just there how much money they're bringing in sales. It will show how the company generates income. So, for example, they might sell, you know, different products, different services. They probably break those out. To a degree, it depends on what income statement you're looking at as well. If you were to look at, for example, Apples income statement, it's not gonna break out every single product line on their main income statement. It's just going to show product sales or services if you get deeper into the analysis, though, and the reports they put out, you can actually find a breakout than of those sales based on product line. Nonetheless, that's just in the side. So the Romney is going to show you how the company generates income. What what it has if its products that services, Maybe it's both. Revenue on income statement does not necessary mean incoming cash in the period the client has been invoiced not yet paid. So this is important, Um, and actual. Let's just read the final point here first. So that's an accounting principle. You recognize revenue in the period it's earned its called accrual accounting. So let me give you an example. If you were to sell whatever it might be, let's just use Apple again. Um, they sold an iPhone on December 31st but the customer didn't pay. For whatever reason. Maybe they sold a bolt golder to ah wholesaler. So Apple has sold those iPhones. They will be paid in January, but they haven't yet received the funds for them Well, so the December 31st income statement is going to show the sale of all those iPhones because the transaction actually happened in December, but they didn't receive cash. So that's the main differentiator here is you have to remember that just cause revenue shows on income statement doesn't mean the company has collected all of that money and just another side. So if you were to look at a balance sheet, balance sheet will show one line, which is accounts receivable. That's money that's owed to a company, and that's where that would be a December 31st for Apple. They sold some iPhones or wholesale them. Uh, the sale happened, so its income, but they haven't received money, so they don't receive cash. They haven't accounts receivable, and that's essentially accrual accounting. You have to match transactions with the period that they actually happened, and not when you get paid. 5. COGS: so cost of goods or a cost of services, and we'll refer to it as cost of goods. Um, so sometimes it's also called cost of sales. Costs of revenues, it concludes, includes several things, and this will be lying directly below the revenue slash sales on your income statement. Um so it might also include the cost of labor, cost of materials, cost of shipping. And essentially, it measures all the costs that are directly associated with creating a product and the service of deliveries. So, no, what were essentially trying to do is show. Here's how much we sold. So for Apple, you know, we sold X amount of billions of dollars of iPhones and Macs and everything else, and then the next line would be, well, here's how much that costs. And it's not every single expense for the company. It's sort of the direct cost to make those products. So it's the things like the materials, the direct labor that went into making those So, for example, the person on the factory floor who's assembling an iPhone. Their salary would be included in cost of goods, but the marketing executive is not including their because it wasn't directly involved in making and manufacturing that good. Ah, then as well, material. So that would be like the products that parts and pieces. And then the shipping is, well, basically everything it took to go from nothing to having a physical product that could be sold would be included in cost of goods. Um so, as it says, it measures the counselor directly associate with creating the product for items built. So thinking of a factory setting, which certainly apple would be typically labor. So I mentioned direct labour and then overhead costs are built in the cost of goods sold. So think of Ah, you know, a big warehouse. You know, they're building iPhones. I mean, there's certainly the parts that makes sense. And there's a direct labour. There's the people who are actually like doing its job and, you know, assembling phones and pulling the parts. I mean, it makes sense that their salaries be included, but then there's also indirect costs such as overheads, overheads, things like, what about the power to, you know, power of the factory to do that so that cost is one where well, without that cost, you wouldn't be able to produce iPhone you need, you know, electricity so that cost is built in a swell. And then there's accounting methods to incorporate that where you take the cost of and you divide it and figure out what that is on a per unit basis. And you know how you associate. You know how much power should be allocated to the warehouse versus Maybe there's executive offices there as well. Well, you know, the portion should be allocated to executive offices, which wasn't a direct cost of goods sold. You know, that's more related to the operations of the business, so there's not quite a bit of accounting that goes into it. But for our intents and purposes, you just want to know that pretty much anything that is directly related or to the creation of a product or the service and as well, sort of allocating other sort of outside things like electricity is the perfect example to that product as well is included in the cost of goods. Eso. When a company is a service company, they show cost of services, and it's the labour director later to a sale. So I like to think of a consulting company. So if 100 hours or build to a client and the labor costs, um, the labour Castro's 100 hours is, is what your cost of sales is so cost of services. I'm sorry. So, for example, you know the consulting firm might build out their consultants at $100 an hour, but they only pay them $50 an hour, so you would essentially show the sales at $100 per hour, and then the cost of services would be all those same hours. But at $50 an hour, that's actually paid to the consultants. And that's essentially so works more or less the same cost of services you typically then don't get, like indirect overhead and electricity and things like that. It tends to actually be a little bit more straightforward. 6. G and A: so G and a expenses are general and administrative expenses. So this is below scenario. What we've had revenue. And then we had our cost of goods or cost of services, and then we probably had a sub total that showed. Well, here's how much money the company made. Just based on, you know, the sales themselves without all this sort of other indirect costs. Um, and now we move into those of G and s. So it's money used in business operations. So think of things like salaries, rent, telephone, not directly relate with production of goods and services. So again, we talked about how the you know, the warehouse employees whose assembly phoned their salary would be included in cost of goods. Ah, but the marketing executive or the accounting team payroll staff, all I t department. All that is just the salary. That's a general and administrative expense. There's some gray area and what could be a cost of service or where I cost the goods versus a G and a expense consistency and accounting rulings are what determine what's appropriate . So there's quite a bit of accounting rules out there, and they're continually being added to and refined. So if you ever have a question as to what should be included or what should be classified, as which it's best to turn to the rulings and it's fairly easy to then find or ask, you know, a C p A. Who could I could teach you that Gina is typically tracked by department. It could be examined for increases and decreases. So, you know, if you were to look at a company's just overall income statement, you might see you know payroll expense, and you might see payroll expends increased 20% from last year. And you go, Wow! I wonder why that happened. While you could drill down then and dig into the different departments and see that there was one specific department that maybe did a bunch of hiring May was the sales department. Whatever the case might be, there's always an answer, sort of beneath the surface, and you just sort of investigate that on try and find out why. By the numbers changed, marketing is usually considered either G and a expense or broken out as its own categories . So depending on sort of the materiality of it, no. If marketing is a huge portion of your company. You want to show it as its own line items. So say like G and A was $100,000 marketing with $1,000,000. Well, you certainly want to show marketing on its own. You don't want to, you know, combine them both and say, Well, our Jeanne was 1.1 million when really Gina was 100,000. Marketing was mil 1,000,000 on its own. 7. Selling Expenses: so selling expenses, which is also in part, can be marketing as well, which we talked about in the previous video. Eso selling is still part of operating expenses. We just break it out separately because kind of a bit different nature from the salaries and the travel on the payroll, all those things. So, uh, selling expenses. Air tracked separately from Gina. As it says here, uh, selling includes sales, department salaries, marketing salaries, marketing materials, advertising, promotional, etcetera. Usually this tends to be a big section for companies. Now, maybe not everybody's, but quite a few companies. This will be a big enough number, and that's why you really want to be able to break it out individually by, you know, under the selling category, then break it out into things like, How much did we spend on promotional materials and how much were salaries and how much, you know, advertising that we do and then maybe even go so far. Letters to keep track of advertising avenues. How much do we spend on online advertising versus television? So all the above attract individually as well underselling umbrella. So again, typically on an income statement, you're not going to see that level of detail. What you'll just see a selling expenses and then depending on the software and the way you're delivered, the numbers you might be able to drill down then and get the detail. Or you could go find out the detail from the appropriate people and get that breakdown, then for the numbers, so you can have a better sense when it comes to analysis. ESO while sales and marketing teams do drive sales, are not considered costs of goods or cost of services. They're an indirect expense related to the ongoing generation of revenue and allocate to cost of goods and cost services through an allocation method. So ah, that might begin a little bit site outside the scope of this what we're trying to accomplish in this course. But just know that I mean, you could make a sort of a case for lots of different expenses on why they could be included and cost of goods sold. And certainly market is probably the 1st 1 where it's it's one of the ones that's not. But you could say, Well, without the marketing, we wouldn't sell the products and we wouldn't have any build. That's very true. But same things like if you don't have the county department wouldn't create financial reports and you wouldn't have a company. So, um, there's a case to be made for just keeping marketing as a sewn, separate sort of expense, and they're directly involved in the production of the items themselves. And that's why there then considered a, uh on expenses, part of operating expenses and not up above the line is we call it in custom goods. 8. Other Income and Expense: So as you move down on income statement, you know, we had a revenue or cost of goods or services. We probably sub total, then gross margin. Ah, that we had our operating expenses. So we talked about G in a are selling expenses marketing, sometimes one we didn't cover but is R and D. So if you work in a company that does a lot of, um, production, actually, Apple is one. If you were to look at Apple's income statement, there is a whole RND section as well research and development. But from there you typically then have another sub total and then below that is other income and expenses. So what are these? What would not qualify? Something to be up above in the other categories? Well, these air income and expenses not directly related to the primary operation of the company . So a lot of times companies will include depreciation, amortization down in the section. Let's just read through these, and we'll talk about more about them. Other examples of the A one time gain on the sale of a division. You also have extra nor extraordinary income and losses as well. So an insurance settlement is the often the example, given that the extraordinary income it's not income you earned in the normal course of business. And it's also a one time thing. Interest, income and interest expenses also included in other income and expense their generators part of doing business. But they're not the primary business. So I think that last statement says it all pretty much. Everything that's included in other income and expense are just They're either income and or expense, but they're not part of what you do as a normal company doing business. You know the insurance settlement well, for one is probably one time thing, and two, That's not how you actually make money. Imagine if you were to include that in in your revenue section. It would definitely skew the numbers because you might have a huge insurance settlement that you landed, and that's going to be a one time thing. And people can't expect that to happen again. Um, depreciation amortization are essentially account features of accounting, you know, and sort of writing down your assets over time to their fair value. Nothing to really do with the operations of the business and what you have control over so on then, as it mentioned to like interest, income or interest expense again, that, I mean, that's real money that's coming into the business or leaving the business. But it's not what you do as a business. So that's why we want include all these sort of down in their own little section. Typically, they're not relatively large compared to the other numbers in the income statement s, so they wouldn't have a huge impact. But just in case, we want to be sure to break those out. 9. Introduction to Tips and Strategies: Okay, so next I just want to introduce you since to some tips and strategies, and then we're gonna talk about each of these in much more detail as well, but to give you a sense of what's coming. So now we can have a little understanding of what is on the income statement. How are we going to do with that information? So the income statement, first of all, is best compared to other periods to see if the performance is improving its steady, it's declining. Second, we're going to slice the income statement based on divisions, geography, products. We'll look at those numbers in lots of different ways. Third, we want to relate the income statement to other financial statements. I mean, there's several other large financial statements as well, which provide valuable information when you use them all together in tandem. That's when you really get a picture of how company is performing. You want to understand how the revenue expenses related to the company's cash flow as well . You won't understand ratio analysis for really further in depth understanding. You really need to get into some ratio analysis on the numbers, which sort of help sort of set the benchmark, if you will. And so when you compare it to other companies or other divisions or just two previous periods previous years, you're using common denominators, and the numbers will then make a bit more sentence up. In the next five videos, we will talk about all of this. 10. Income Statement Comparisons: All right. So first of all, the income statement is best when compared to other periods to see if the performance is improving steadily declining. So ah, standalone financials air Good for assessing how a company performed for that time frame. But analytics are limited. So just think about if you're just looking at an income statement for the last year, I mean, that's great. You're going to get a sense of you know what? You know how the profit margins were. If the company made money, it didn't make money. How, you know, selling expenses related to general expenses. But you can't really compare it. You have no frame of reference for How did you do compared to the previous year, previous several years? And that's where the analysis part comes in. Comparing to prior periods helps at insight into trends good or bad. And I mean, you want to know those things as a either an owner of a company or potential investor. You want to see how things are trending, and definitely if you compare it a few different income statements for periods and different years, that's when you really get to see like okay, well, revenues went up, but so did cost to get sold. And but at the end of the day, they made a little bit more money, so that would all be good. But maybe cost of goods sold increase proportionally more than it should have. And that's things you want to look for. Um, not all increases in expenses or bad. So again, if the company is selling more and it's growing and now payroll expenses higher, well, that's just a necessary evil you need to have. Ah, an increase in your in your staff with company tends to grow so key in on areas that might be trouble. So looking for things like American expenses increase. But there's no increase in sales. Well, what's the reason for that? And there might be legitimate answers, possibly, you know, the company spent a lot of marketing in December, and those that marketing effort just hasn't transpired into sales yet, And it will in the new year. Maybe it was a big push for January that they were preparing for, um, possible. But on the flip side, maybe it was bad. Maybe that was marking this over the whole year, the company tried to you know, just throw more money at marketing, and they just didn't do it very effectively, and the result was no increase in sales. So, um, you really need to dig into the financial statements to get that level of knowledge. You can't just see that on the surface as well. You want to understand the correlation between various expenses and revenue items to determine what's good news. What's bad news? So we kind of touched on the marketing expenses and also the payroll. An increase in payroll is fine if sales is also increasing. But an increase in you know, payroll isn't so great when sales are decreasing. And, you know, maybe the company went from being profitable to not profitable. Well, then, what was the story and why did why did the company have an increase in payroll to begin with? So once you dig in and start looking at line by line, that's really where the analysis comes in. And then, even more importantly, comparing those line items to the previous period. At a minimum, ah would also be highly encouraged. The other bit of just ah added information I would give you is you should always compared to the previous period. So now I'm nothing of a year. I'm thinking of something like 1/4 or a given month. So say 1/4 say your quarter for some, Ah, October, November, December And you're in a retail environment that's typically your busiest corner. That's, you know, all the holiday sales. So you want to compare that quarter to the same quarter from the previous year, not just the previous quarter from this year. Um so comparing quarter for you know, this year to quarter for from last year makes a lot more sense. And then quarter for this year to quarter three of this year cause you would almost expect to see growth like it shouldn't be a surprise. Ah, the rial announced. This would be seeing how the company improved over the prior year. 11. Slice The Income Statement: All right, so next that encourages a slice the income statement based on divisions based on geography based on products at a minimum. And that's typically the three big ones. So you know, when you look at an income statement, especially for like a publicly traded company or even your own, you know, you're just looking at the overall consolidate income statement. It's the entire company combined into one, which is fine. You want to see how the company performed. But if available, then and once you get into this analysis, start looking at an income statement broken out by division by geography byproduct. Now all this is very easy to do with accounting software, assuming everything is set up correctly and typically would be, if especially the larger the company you're in. Um, and then those become really, uh, interest in the reeds because, for example, in the next line, even over performing divisions can mass problems in one division when looking at those consolidated numbers. So you know, once you get the income statements by divisions, you'll spill to see well, how much and you don't expect to see necessary, like the marketing department or your account department isn't gonna have revenue. There's nothing zero revenue there. But what you're looking at is the expenses and you're comparing, say the county departments expenses from this year, the last year and also the market departments, etcetera. So once you start looking at those, maybe you see that there's one department that really overspend on their help, their kind of dragging the company down. So now you have a little bit more focused on where you can direct your attention to. Same concept applies to product lines, geographic locations. So again you run a income statement for you know, your North American division and for your South American divisions, and you see that? Oh, well, it turns out South American was actually really profitable. It really grew this year, but the North American division didn't as much so things like that when it's all combined, just kind of mass each other's performance. You know you have one good one bad that kind of override each other. Maybe you have three good divisions and one bad division, but you don't know that until you break them out and really compare them to their own information. So it's all about comparing the relative information to each other. And as I said, if the county system is set up properly, it's not difficult to do this. I mean, it's a little bit of work sure to break out our to run different reports and get the income statement by each year, geographic locations and then spend the time to do the analysis on each of them. But often times it's Ah, it's an exercise well, well were spent and you'll find out valuable information about your company and where you can really hone in on areas to work on as compared to just sort of having an overall picture. 12. Relate Income Statement to Other Statements: so next said, encourage you to relate the income statement to other financial statements as well. So understanding how the income statement impacts on their financial statements is important. So, for example, revenue does not necessarily mean cash collected. The company could be at risk of uncollected revenue. So we talked about this in a previous lecture. You know, you could sell a lot of items, but if people haven't paid you for them yet, it's not actually cash in the bank. So companies often times will take, you know, their income statement the look of the bottom line and said, We had profit of a $1,000,000. Great, you know, And then in back their heads, they're thinking that's just money in the bank, you know, that's after all the expenses and everything else. But the reality is that maybe they didn't collect on half of that. So on, maybe you have a big portion that will end up getting written off because it doesn't get collected on. So you really need to be aware of, you know, then how to go from an income statement to say a balance sheet and see well, how much do we have in accounts receivable right now, companies which are underfunded, maybe accruing salary expenses that can't pay. So, you know, you might again show an income statement, which looks great and, you know, it has salaries and everything else. And then you go the balance sheet and do you see, you know, a crude salaries of millions of dollars and again, uh, this comes from experience. A lot of times, early stage start up for growing companies, you know they'll recognize the expense for salaries, but nothing's been paid yet, and that's going to eventually take a hit on cash. I mean, it might not currently, but at some point those salaries are gonna have to be paid. So it's important to know that I know that you can't just, you know, in an infinitely accrue for salaries and never pay them. Um, ongoing profits and loss accumulated on the balance sheet has retained earnings to get a sense of past performance. So if you were to pull out of balance sheet, look at towards the bottom in the equity section, there's a line item called retained earnings. That's exactly what this says is every year your your net profit or your net loss goes to that retained earnings line, and it's a way to sort of keep track of overtime. Was the company profit or not profitable? Um, so even though you might have a, you know, a good year this year and you show that profit of whatever amount of $1,000,000. But if you were to look at the balance sheet and see, you know, retained earnings as negative $100 million so that means the companies done pretty poorly in the past, so making a 1,000,000 is really just the the start of righting the ship. So I definitely want to see how those related and then what's not on here, as well as maybe a statement of cash flows. You won't understand how AH line items on your income statement relate to the statement of cash flows, which is a great way to actually then break out the actual cash and see how it has come into the company and how it has left the company 13. Income Statement Related to Cash Flow: all right. So, as I kind of started to say in the previous lecture, you want to understand how revenues expenses relate to the company's cash flow. S o many line items on the income statement may or may not have a cash impact. You know, crude salaries we talked about That shows an expense, but there's no cash out the door yet. These air salaries that you owe somebody, but you just haven't paid them some expenses will never result in cash going out. So depreciation and amortization those air just accounting functions that need to be done due to accounting rules and so that you fairly reflect the value of your assets. Essentially, what you're doing is writing them down over a certain amount of time, and you have to recognize that expense. But that's not, actually, it's not expense. There's no money being put out for that. So these expenses on the income statement that don't actually result in cash flow items, so don't assume the income statement reflects actual cash. I mean, again, we touched on that before, and I want to reiterate it, cause it's often a common mistake. It does, however, indicate how the company is performing, so yeah, I mean, you need to know how to handle things like depreciation amortization. But at the end of the day, um, you want to use the income statement for what it's for and that's really a judge of how is the company performing, you know, relative to the sales and expenses, And is it turning a profit or isn't not? And then you kind of further dive into things like the balance sheet and cash flow statement to see how the business is functioning in other fundamental areas as well. 14. Ratio Analysis: Okay, Okay. So another way to sort of analyze your income statement and a big fan of this is ratio analysis. Um, some ratios help equalize the results in a percentage format, so let's just look at a few common ones. So common ratios for an income statement would be gross pop, gross profit percentage, net income percentage, even top percentage. And we'll talk about all these in the second. Earnings per share as well is keying on specific expenses, which are most relevant. So, um, down here, so gross profit profit percentage is basically a gross profit divided by your revenues. It's how the company's gross margins are. It's an indication of profit on a product of service before all the other expenses. So your gross profit is that number that's right out. It's your revenues, less your cost of goods sold. That number is gross profit. So again, compare two different years. I'd like to throw out example so say, one year you sold ah $100,000 in sales and that your cost of goods sold was 50,000 Well, so you so 50,000 divided in profit divided by your revenue, and you had a 50% profit margin. So say the next year, though the numbers are completely skewed and you sold a $1,000,000 coming. It really took off. But you had 600,000 in expenses or costs. I should say cost of goods. Well, you're gross profit was 400,000. Some from a numbers perspective, is tremendously better. But from a ratio amount you now dividing 400,000 by a 1,000,000 it's only 40%. So you went from 50% margins to 40% margins. That's where companies, where this sort of ratio announces really comes in handy cause what cause up. And especially in that situation, you're thinking well, as companies grow and they get better economies, a stint of scale, if anything, their emergence should be improving, not getting worse. So, uh, while the numbers themselves air fantastic, I mean, the company sold 10 times as much the actual money that they profited off. That went down from a percentage perspective. So what happened there? So those questions you ask when you start looking at the different ratios, so next we have net income percentage, so it's your bottom line after all the expenses, so it's kind of a similar thought. You know you're seeing net income divided by your revenue, your overall profitability of the company. So again, you know, your sales went up in that example agave from 100,000 to a 1,000,000. But if your bottom line didn't increase proportionally, then there's something else going on, and that's where you really start there. Then dig in and take a look. So EBITA is a term you will probably hear it some point in your life. Eso earnings before income tax, depreciation amortization. So it's another level of sort of profit analysis. But it's not including all those expenses that we talked about, which you don't have control over and or aren't really business related. So income taxes, you know, you just have to pay. You don't get a choice to pay those depreciation, amortization or accounting entries. You just kind of have to make those They're not really a business choice. Um, so you look at your earnings before those numbers, so it's essentially the net income that you had control over divided by revenue, and then you would do that same analysis and see if you're improving or not approving 15. Dos and Donts: Okay, so next let's talk about just some general do's and don't. So we've kind of covered a lot of different information. You know, the different sections of the income statement, what they are and then sort of things you should be looking for and how to handle each them . So let's just talk about 10 sort of overall start takeaways, if you will so compare the current period of prior ones. That's my first sort of bit of information. Um, you know, don't just look at income statement on its own. I mean, certainly do. But then compare it to previous periods. Understand what ratios will help further add depth to the information. So we just talked about ratios you know you want to find, and there's certainly lots more out there. I just want to give you a taste and introduction to some. So go out there and find out about the different ratios that are important in this. It's also very industry specific. There might be ratios that apply more to the industry of the year in than toe others, so find out what those are and apply those toe the numbers, and then you contract trends and see if you're doing better or worse, learn how to read the notes an M D and A. So when you get up to public company level, Um, part of your published financial reports will also include um notes, which explain the numbers and then m D and A is management discussion and analysis, where they further explained the number. So you want to know how to read those because there's a lot of insight into those. So if you're looking at this from a perspective of you want to learn how to read income statements because you want to look at public companies a bit more, we'll learn and understand the notes in because they really add a lot of insight into the financial numbers so you can do your own ratio analysis and everything else, but often times in the notes or the M D and A will be some insight that you didn't have that will help you out. Always look for trends so good or bad as well it should say. I mean, if you look at the past 34 years and you see your gross margins air, you know, steadily increasing, maybe 1%. That's terrific. You found some, you know, efficiencies there. But on the, you know, the downside. If no, the gross margins have been steadily getting worse. 12%. Well, something is slipping, and you have some sort of leakage there. So you wanna, you know, figure out what that is and act on it. Ah, so do check if the numbers match what you're expecting based on business events. So, you know, let's say you had insight. You knew the company was signing a large contract for a $1,000,000 the previous year, they sold a 1,000,000 just on their own. Anyways, without a big contract, we would start to think. Okay, well, somewhere around $2 million if they performed as well as last year. Plus this new contract. So see, if you do those numbers really match up. I mean, it doesn't need to be that to the dollar type of exercise. You just want to make sure that you know, whatever you were kind of expecting kind of happened as well. Um, don't assume that downward trends will always be ongoing, So if you're looking at numbers, you know, sales, maybe maybe been declining um, it doesn't mean that's gonna happen indefinitely, so you don't want to project too far forward. And that's where. Also, if, say, you were reading public companies information, reading the notes gives you a lot of insight into new products that are coming out things like that. So, um, you don't want to project too far for you don't want to say, and you could do that as well on the upwards trends you don't want to say just cause the company's made money year over year for five years that it will always make money. You're over here. It just doesn't happen. Don't look at summary information if there's details shown are available. Um, again, it's not necessarily harmful to look at summary information, but I encourage you to really dig down into detailed information when you can break numbers out. Divisions, products, geography, all those types of things. Um, don't be sure that the past performance will indicate the future. So again, that's kind of that up. Or trying to talk about just cause the company is maybe, you know, consistently earned a profit. Maybe it's been growing. Maybe they paid dividends year over year again. That doesn't mean it will always do it. Don't be confident that the internally generated numbers are correct. So depends on your situation. What? You're what you're in. But if so, if you're looking at a public companies financials that have been audited, you can be fairly confident that they're correct. But even in those situations, a lot of times companies have to restate their numbers because they find a big error mistake after the fact. Um, and then especially, have been dealing with private companies really want to be cautious because it's too easy for mistakes toe happen or accounting to be done and properly? Um, so you have to take them for what they're worth, but you can't be 100% guarantee there. Correct. And lastly, don't be shy about asking questions. So whatever role you're in if you are the owner of a business and you have questions about your income statement, if you're an investor in a public company, go ask questions. Get your answers, get the answers to your questions because there's no sense and sort of always wondering, like what? What something is about. Or maybe wide ratio changed, or whatever the case might be 16. Case Study 1 Growing Private Company: Okay, so next we're gonna go through three just short case studies just toe kind of identify how three different companies handle their their year end financials and the analysis. So 1st 1 is a growing private company. So and these all come from real world experience that I had So a zoo growing company who wanted to understand by department where revenue expenses were being generated. So they started breaking out departmental income statements every period, including marketing. They really want to see just where where things were being spent. Ah, so was able to task the marketing manager with reducing costs by providing them with specific information on costs they been generating. And the result. The marketing department, along with all other departments, were able to clean up their spending and help the overall bottom line. So this goes back to being able to break out an income statement by department. Um, if you have one department, let's say that's doing really well and doesn't spend much and maybe his below budget. And then you have another department that's over budget. Let's say the marketing department here, Um, but those two probably masked each other on the consolidated income statement. So by being able to break them out and show them Hey, you know what? You're kind of way over your budget or relative to the other departments you spend far more on whatever it might be office supplies, you know, it doesn't always have to be something big. It could just be a small expense. Um, but giving people, you know, the detailed information and saying, Well, here's, you know, ways we can make this better that goes a long way in the wrong ones, sort of the proper way to run the business. 17. Private Health Company Going Public: so case study number two. Here we have a private health company that's going public, so they're gonna go through the AIPO process fast growing company only two years in business, and they're already looking ahead of going public on the stock market, which is remarkably fast to see. You know, all departments have rapid growth in both staff and and spending so makes sense. You know, when your company is growing that fast things, they're just going to really take off eso. While the company was profitable, it was time to really focus and refine the operations. It's easy when things are growing fast and companies making money does kind of go with things. But, um, it really takes somebody in the leadership role to say Hey, well, let's look and see if there's anything we can still be doing better. So besides running income statements by department, each department was tasked with projecting forward their annual income statement by spending expense item from marketing. So in this case, yet with marketing department was tend to pick on market, especially in a growing company. Uh, you know, that's where a lot of money goes. Results projections were rolled up in a one master budget for the company. The departments were held accountable the projected expenses and income statements. So you know, So it's not just a matter of saying, Look, here's how much you spend. It's like, Well, here's how much you spent Now tell us how much you think you'll spend next year. And then that's what was eventually ruled together in a master budget and then, But you hold it departments accountable to those numbers so they don't just throw together anything. You want to make sure that you know people put their best effort forward when creating these projections, and then it also gets buying from department. So, for example, March Department, you know, if they say, hey, we're going to spend whatever $100,000 on advertising next year. Well, they kind of have to stick to that, and they can't go over it or they'll be held accountable. And maybe there's consequences in some way 18. Publicly Traded Tech Company: The last case study here is a publicly traded technology companies, so they're already public company in business about eight years. They were public for four of those years. Ah, slower growth, but consistent growth. So you know they're more of an established business, if you will, in contrast to the fast growing companies looking to further expand. So since it's an R N de, which is research and development based company, there's not much marketing they really do. Um, in the traditional sense, you know, they're really just developing new products, finding things that work and then creating new products and selling them. Ah was able to more effectively allocate spending and plan overall corporate growth by looking at departmental income statements. So again, another case made for really breaking out the income statement into whatever makes sense. In this case, it was departmental spending. Um, you know, in other examples that could have been, you know, geographically, especially companies that are international. You really want to look at your sales and revenues. Uh, Casa gets all those things by geography and see where you can find room for improvement. But nonetheless, in this example, you know, they took the steady, slow growth company really dig down, get the details and use that information that knowledge to only better the company and then continue to grow. 19. 10 Point Checklist: So next just a 10 point checklists ous Firas interpreting, analyzing your and income statements. You know, we've covered a lot. Um, again, it's kind of want to give you some highlights of things you should really consider. So number one hopefully have driven. This home is go for the details. You want that? You know, look at the consolidate income statements that really go for those details. You know, whether it's the, you know, breakdown by division, or but by geography or by product line, make sure you have all the correct details. You don't you want to make sure one that the finance statements are finalized in that they're closed and that you know, when you get sort of departmental income, statements that they do tie together and add up to the final total have a comparison from past year financial. So again, this is that compared to value. And that's really where I think between this and ratio announces, is where you really learn the most that has so much color, too, to the numbers other than just looking at random numbers examined not current, but also passed reports. So you know, oftentimes, too. I mean, depending on how much time you want to vote to this. But sometimes numbers change, so you might be given a current income statement. You pull out your old income statement from last year, but maybe something got adjusted to that previous one. So you want to make sure that you have the latest information. Um, but also that you then use that information and compare it and see how things have changed . Ah, ratio announces over a period of time has performed to see the company's performance. So, you know, we went over just a few ratio analysis that you could potentially do. There's so much more out there, um, and encourage you to really dig in and learn more about ratio analysis. When it comes the financial statements, it'll it'll provide color on how the company is performing in the current period or year. You can compare it to previous years, and the other benefit is you can compare yourself into other companies that are in the same industry, for example, So, um, you know, by breaking it down to a common denominator by using ratios, it's a lot easier to compare performance. So always be precise. You know you don't want to be, you know, sort haphazard with your analysis, you know, know what you're looking for. And almost over time you almost develop a sense of what, what you want to see and what you're after. What information are trying to get to when doing analysis of income statements. Eso If you're looking at public companies, financials understand the M D and a footnotes and also just the notes, Um, which is management, discussion and analysis again, it really adds color to the numbers as well. It's another way of adding sort of a level of analysis and interpretation to financial statements. Ah, I encourage you if you're not familiar with public company financial statements, if you search on Google or wherever for SEC, which is Securities Exchange Commission, um Edgar, which is their Elektronik filing system? Um, once you'll find a link, you'll be able to search for any company. E. If you're looking struggling for one search for Google or search for Apple Amazon, any of those and you'll be able to see their last financial statements and see all the M, D and A and the footnotes. Financials will show the company's performance so you want to again? You know, the whole point of the income statement isn't just to dig into and pull it apart. It's also just give you an over idea of how is the company performing investors and executives check the financials before the other. So by the time so if you're looking at a public companies financial statements, they've been audited. They've only been viewed by executives by possibly investors. If it's a smaller company, private company investors probably review them before they got distributed as well to anyone else. So, um, so the numbers have gone through several sort of hands, if you will and have been reviewed, make sure you have all the categories or sections in your financial. So, um, again, this should go without saying it, and I don't see too many reasons why they wouldn't include it. But you want to make sure there's times when companies, or maybe there's maybe a better example of this is you know, you were really hoping to see a break out of marketing. But the company just lumped in with other general and administrative expenses, and you have no insight into the details. Well, whatever you can do depending on your situation. If you can get that detail, whether you're able to get it yourself or you're liable to request of the company, I'd highly encourage you to do so. 20. Course Conclusion: All right, everybody. Well, congratulations. We made it to the end of the course, so I just want to go over a few things here. Lets go of three sort of final summary points. Um, and then we'll wrap up the course so essentially, when broken down a different ways, a lot of information can be found in financial statements. I mean, I encourage you to really do that breakdown by divisions, geography, etcetera. And also just even breakdown different sections of the income statement, like drilling to marketing and see what's included in there and then as well compare them to the to the previous periods. I mean, that's and also use that ratio analysis. I think those are my key takeaways for you. Ah, the financials tell a story of their company, and their numbers don't lie. So, you know, these numbers have been if they're public home, have been audited gods from many hands. Um, so you can use them as a judge of what a company is doing performance wise. And then, if you are looking at a public companies, notes are sorry. Income statement. The footnotes in the M D and A, which is management discussion and analysis will help you understand, uh, the company's take on why the results are the way they were and why numbers change from previous years. So you'll really I think you'll be amazed at what if level depth of information is included in there, where they'll really breakdown expense. My expense, you know, like travel increased because of this and, you know, marketing spending on online advertising. Chris, because of this and they really break it down. So it's actually a good place to start before you get too caught up in your ratio analysis and everything else because it helps out a lot of color. So on the next slide will skip ahead here, just wrap up. So there I am again. I'm Chris Benjamin. Ah, feel free to reach out and contact me if you have any questions during the course I having , or even now, after the course that I would encourage you send me a message through the course website happy to answer any questions as well. If you have any feedback, I'm certainly there's a feedback system through the site here. If you go ahead, leave your feedback and any comments. I really appreciate them. If you had any problems during the course, definitely let me know. Love to make it right for you Somehow first, and lastly, just I encourage you to check out my other courses. I have a lot of different courses up. All related to accounting and finance. Um, Excel, different modelling techniques, entrepreneurship, all different types of things. I really enjoyed being your instructor on this course, and I look forward to being instructor, hopefully on many other courses as well. Everybody have a great day.