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Walk me through an income statement?
This is one of the most common Investment Banking Interview question.
Net Revenues: also known as “sales” is the top line of most income statements and tells the reader the value of goods and services sold by the company in a period.
Cost of Goods Sold (COGS): Also “cost of sales” represents the direct expenses that are incurred by the business to generate revenue or sales.
Gross Profit: Revenues less cost of sales is broadest measure of profitability
SG&A – Operating expenses that are not directly linked to generate revenues – salary (Manufacturing), marketing, administrative, commissions, travel and other ancillary expenses which at times also includes research and development.
Research & Development: Expenses that are directed towards developing new products or procedures.
EBITDA: Earnings before Interest, Tax, Depreciation and Amortization is Sales less all the expenses listed above i.e. Sales – COGS – SG&A – R&D.
Depreciation: The allocation of costs related to Property Plant and Equipment on a piecemeal basis over each period.
Amortization: The allocation of costs related to intangible assets on a piecemeal basis over each period.
Other operating expenses: Expenses which are not classified in the above listed categories.
EBIT- Earnings before interest and tax is EBITDA less D&A. This is also known as operating profit of the company.
Interest Expense: Cost related to the interest that a company pays on its borrowings.
Interest income: Interest income generated from deposits at banks or other short-term investments.
Unusual or infrequent income expenses: These are expenses which are one-time expenses, including restructuring costs, Gain or (loss) from assets, disposal of a businesses, impairment charge and write-offs amongst others.
Pre-Tax profit: EBIT – Unusual income/expenses.
Income taxes: Expenses owed to tax authorities and calculated on pre-tax profit.
Net Income: All revenues and incomes less all expenses.