Earnings Statement Part 1

Quick reference

• 00:04 Hi, This is Ray Sheen.
• 00:06 Let's look at earnings statements.
• 00:07 It's one of the most fundamental of the financial statements.
• 00:10 This is the first of three modules on earnings statements.
• 00:13 In this one, we'll look at a sum review of that statement.
• 00:16 Lets go. The earnings statement is structured like
• 00:19 this.
• 00:21 It has two major sections.
• 00:22 The first is the revenue, and
• 00:24 shows the major categories of money coming into the business.
• 00:27 The second is expenses, and
• 00:28 shows the categories of money going out of the business.
• 00:31 At the bottom is the difference between those two, the net income.
• 00:35 You may have heard someone say, so tell me the bottom line.
• 00:38 That phrase comes from this financial statement.
• 00:41 After all the revenues and expenses are counted,
• 00:43 what it is finally left over is the bottom line, the net income.
• 00:47 Let me put this into a personal perspective.
• 00:49 The closest corollary is the annual income tax return that we complete.
• 00:54 On your income tax, you start by listing all your wages, earnings,
• 00:57 and dividends, the money coming into your household.
• 01:00 Then you list your deductions, which are the government's allowances for
• 01:04 the money that you spend to sustain your household.
• 01:07 What is left is your earnings before taxes and you pay income tax on that.
• 01:11 Well, look at the earnings statement.
• 01:14 We see the revenue, the money coming in.
• 01:16 We see the cost of goods sold, operating expenses, and interest.
• 01:19 Which are the money we must spend to run the business.
• 01:22 That gets us to the third line from the bottom, the Income Before Taxes.
• 01:26 Taxes are paid on that amount just like on your personal income tax return.
• 01:31 So as you can see, this statement shows us how much money the company has made.
• 01:35 It is sometimes referred to as the income statement, the profit and
• 01:37 loss statement or the statement of operations.
• 01:40 Whichever name you use, the financial report does the same thing.
• 01:44 Revenue minus expenses gives us net income.
• 01:47 It should also be obvious that the earning statement is based upon some time period.
• 01:51 The revenue and expenditure transactions for
• 01:53 that time period are cumulated onto the report.
• 01:56 The time period is usually for a month, quarter or year.
• 02:00 And since we're talking about a time period, it also means that the method for
• 02:04 setting the time or transaction is consistently applied.
• 02:07 Most businesses use the accrual method, which means the time for the transaction
• 02:11 is based upon when the product or service is delivered not when the bill is paid.
• 02:17 Let us create a picture of what this looks like.
• 02:19 Okay, the earnings statement structure is In- Out = Value.
• 02:23 Or more particularly revenue, that is sales, minus expenses,
• 02:26 that is costs, equals earnings or profit.
• 02:30 So picture the business as a big barrel.
• 02:32 As the business sells the products and services, that barrel fills up with money.
• 02:36 But that money must be used to run the business.
• 02:39 Some of that money is used to make the products and pay for
• 02:42 the services that the company provides to the customers.
• 02:45 This is referred to as variable costs, or cost of goods sold, COGS.
• 02:50 The two primary components of this are raw material and
• 02:53 operations labor associated with making the product or delivering the service.
• 02:57 But, even if no customer buys a product on one day, the company still has to pay for
• 03:01 its normal operating expenses.
• 03:04 These are sometimes called the overhead of the business.
• 03:06 If the door's open, the business must pay for these.
• 03:09 Things like rent and utilities, the HR department or IT department.
• 03:13 Even sales, marketing, and R&D staff are in this category, because their salaries
• 03:17 must be paid every day, whether a company sells a lot of products, or only a few.
• 03:22 For our purpose in this diagram, even interest and taxes are included.
• 03:27 What is finally left is the net income or earnings.
• 03:30 From a business owner perspective, this is the profit or loss that they are so
• 03:33 concerned about.
• 03:35 Unless the business is able to consistently create a profit,
• 03:38 it will run out of cash and go out of business.
• 03:41 So this is the earnings statement.
• 03:45 It's the most popular of the commonly used financial statements.
• 03:49 Because it really shows how well a business is being managed and
• 03:53 then it shows how much money has been made during the period of the statement.

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