Profits and expenses
Here is a video that I made that helps outline what each section of the income statement represents, with a keen interest in looking at the profits and expenses that are stated on the income statement.
video transcript
In this video, we will begin to actually start working with a real-world income statement, and a real-world balance sheet. We will be looking over the income statement of McDonald's Corporation, and we will attempt to differentiate some of the different types of profit and expenses try and find out what they mean. The first thing that we want to recognize and acknowledge here is that all values here are in the thousands of dollars. For example, if a number that we see on the income statement reads 100,000, because the numbers are in the thousands, we just add three zeros to the end of the number, which would make the number I just mentioned 100 million. As we see here in the top, these are the quarterly figures that a company reports during every earnings season which comes around every 3 months. Again, to recap these are the numbers of the company over a span of three months. Okay, now that we've got those things out of the way, let's actually dive into the numbers of McDonald's. The first figure that we see at the top here is the revenue. For McDonald's it looks like this number is 6.7 billion dollars rounded. This is the cash that the company has earned during these 3 months without any deductions, that means they haven't paid off interest, or debt, or taxes, or what have you. Below this line we have the cost of revenue. This is the cost of anything that has made cash for the company. In this example, we could say the cost of revenue for McDonald's is the price of buying the beef, the chicken, the salad, and maybe advertising, basically everything that has made them money. To name an example, let's say that I am selling burgers myself. If the cost of me attaining the ingredients for one burger is 2 dollars, than that would categorized under the cost of revenue section.
Once we subtract the cost of revenue, which for McDonald's is about 4.1 billion dollars we get the gross profit. The gross profit is the profit that McDonalds has made through selling all their salads, burgers, drinks, and all that stuff. The reason why we call it gross profit is because we haven't yet taken away other costs from this number yet. Again, all we have to do to come up with the gross profit number is subtract the revenue, 6.7 billion by the cost of revenue, 4.1 billion and we get our gross profit, which is approximately 2.5 billion dollars. Below this line, we have the costs of operating the stores. The only expense that McDonald's has in this category is selling general and administrative. So, here the expense of selling general and administrative is 580 million dollars. These are the general and administrative expenses of the company, meaning this is the expense of paying employees, managers, and other administrative costs. Additionally, we have other general expenses like maybe cost of utilities. Once we subtract the 580 million dollars of operating expenses from the gross profit, we have down here what is known as the operating income or profit. The operating profit of McDonald's is about 1.9 billion dollars. The operating profit represents the cost of the running of the business without factoring in tax, debt, or interest. This means that after paying employees, utilities, managers, and everything in relation with strictly running the business, McDonalds has made 1.9 billion dollars.
As we continue moving down the income statement, we see 17.2 million dollars of other expenses, and often times it is very difficult to tell what this cost is, but think of it as anything that is not involved with the operation of the business, debt, interest, or anything to that extent. After that, we see the profit before interest and taxes, and for McDonald's, they have pretty much the same number when we round it. Now, below this line we see that McDonalds, has to pay 135 million dollars in interest. This means, maybe they have to pay a dividend to their stockholders, maybe they owe debt, and need to pay some off to the bank, or something similar. The reason interest is not at the top here with the operating expenses, is because it doesn't directly affect the running of the business. It is not an expense that is related to the operation of the business. Rather, this is the expense of financing the operation. After we subtract this 135 million dollars, we have the profit before taxes. Profit before taxes is pretty self-explanatory, it is the profit you have made after deducting everything except taxes. McDonalds' income before taxes can be rounded to 1.8 billion dollars. After subtracting the money due for all taxes, you see that there are no more expenses, which leads us to the net income of McDonalds, which happens to be 1.2 billion dollars. Net income, if you already haven't figured it out, is the income that the company has made after subtracting all expenses, paying all workers, managers, and owners. This is the cash that the company can use for whatever. They can transfer it over to the owner's equity, they can use it to upgrade inventories, it's the company's choice. Hopefully, in this video you learned all about the different profits on an income statement and how expenses affects this profit.
Once we subtract the cost of revenue, which for McDonald's is about 4.1 billion dollars we get the gross profit. The gross profit is the profit that McDonalds has made through selling all their salads, burgers, drinks, and all that stuff. The reason why we call it gross profit is because we haven't yet taken away other costs from this number yet. Again, all we have to do to come up with the gross profit number is subtract the revenue, 6.7 billion by the cost of revenue, 4.1 billion and we get our gross profit, which is approximately 2.5 billion dollars. Below this line, we have the costs of operating the stores. The only expense that McDonald's has in this category is selling general and administrative. So, here the expense of selling general and administrative is 580 million dollars. These are the general and administrative expenses of the company, meaning this is the expense of paying employees, managers, and other administrative costs. Additionally, we have other general expenses like maybe cost of utilities. Once we subtract the 580 million dollars of operating expenses from the gross profit, we have down here what is known as the operating income or profit. The operating profit of McDonald's is about 1.9 billion dollars. The operating profit represents the cost of the running of the business without factoring in tax, debt, or interest. This means that after paying employees, utilities, managers, and everything in relation with strictly running the business, McDonalds has made 1.9 billion dollars.
As we continue moving down the income statement, we see 17.2 million dollars of other expenses, and often times it is very difficult to tell what this cost is, but think of it as anything that is not involved with the operation of the business, debt, interest, or anything to that extent. After that, we see the profit before interest and taxes, and for McDonald's, they have pretty much the same number when we round it. Now, below this line we see that McDonalds, has to pay 135 million dollars in interest. This means, maybe they have to pay a dividend to their stockholders, maybe they owe debt, and need to pay some off to the bank, or something similar. The reason interest is not at the top here with the operating expenses, is because it doesn't directly affect the running of the business. It is not an expense that is related to the operation of the business. Rather, this is the expense of financing the operation. After we subtract this 135 million dollars, we have the profit before taxes. Profit before taxes is pretty self-explanatory, it is the profit you have made after deducting everything except taxes. McDonalds' income before taxes can be rounded to 1.8 billion dollars. After subtracting the money due for all taxes, you see that there are no more expenses, which leads us to the net income of McDonalds, which happens to be 1.2 billion dollars. Net income, if you already haven't figured it out, is the income that the company has made after subtracting all expenses, paying all workers, managers, and owners. This is the cash that the company can use for whatever. They can transfer it over to the owner's equity, they can use it to upgrade inventories, it's the company's choice. Hopefully, in this video you learned all about the different profits on an income statement and how expenses affects this profit.