Week 1 income statement

Question 1

net income/loss =

Answer 1

reenues - expenses & taxes

Question 2

when is revenue/expense recognized?

Answer 2

Example: Today you sell a car to Lilly (invoiced), but Lilly can pay for the car
until the end of the year. Should you recognize the “revenue” today?

two types of accounting:
- accrual based accounting
most widely used: required for public firms under European FIRS and US GAAP

• cash-based accounting
  individuals or small business may use this

Question 3

accrual accounting

Answer 3

• Revenue recognized when the transaction generating the revenue
  takes place: e.g., when service is invoiced; goods sent to customers
  … NOT when the cash payment is received!
• Expense recognized when the related product/service rendered
  … NOT when the expense is actually paid!

**Accrual acc. creates a gap between booked income and actual cash flows

Question 4

example accrual and cash-based accounting

You left for vacation in August while had rennovation done.
Rennovation company paid (€800) in September

*wich month is accural based income and with month cash based income

Answer 4

accrual: 800eur in augsut
cash based: 800eur in September

Question 5

synonyms for revenue

Answer 5

sales, turnover

Question 6

gross profit = EBITDA

Answer 6

revenue - COGS

Question 7

COGS

Answer 7

costs of goods sold

direct costs related to the goods sold

example: purchases + production and manufacturing expenses

not included: selling, distribution and administrative expenses, research and development, exploration

Question 8

depreciation and amortization

Answer 8

• Depreciation:
  an “expense” related
  to the fixed assets
  that occurs each year
• Amortization:
  similar “expense”
  related to intangible
  assets

Question 9

two types of depreciation

Answer 9

straight-line depreciation
= same amount every year over the lifespan

accelerated depreciation
= higher amount in earlier years of life

Question 10

EBIT =

Answer 10

earnings before interest and tax = revenue - (COGS + other costs) - dep/amo

Question 11

EBITDA =

Answer 11

earnings before interest, tax, depreciation and amortization

Question 12

order of items =

Answer 12

revenue, EBIT, EBITDA, interests, tax > net income

Question 13

important things to remember

Answer 13

• order of items (revenue etc)
• when are revenues & costs recognized
• depreciation/amortization

Question 14

does the choice of depreciation method matter?

Answer 14

Yes. A higher depreciation
expense (in early years)
reduces earnings before tax,
and net income (in early
years)

o The firm can pay lower taxes
(in early years)
o But higher net income and
taxes in later years