The following topics and concepts were covered in this session:

● The basic structure of the income statement

● The key metrics to look for in an income statement
● The basic structure of the balance sheet
● Dividends
● The link between the financial statements

The income statement, also known as the profit and loss statement, tells you about the income and
expenses that your firm has incurred over a period of one financial year.

The following principles of accounting are followed while preparing an income statement.

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An income statement typically consists of the following line items.

While cost of goods sold, marketing, legal, HR, R&D, depreciation and amortisation are grouped
under operating expenses, interest and taxes comprise the non-operating expenses of a company.

To analyse an income statement, the following metrics can be used:

● Variable margin: It is often computed as a % of sales revenue to enable comparison among

companies and benchmarking with the industry average. It can be computed using the
following formula.

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 ● Earnings before interest and tax (EBIT): It shows the profit from the core, primary
revenue-generating activities of a business. It can be computed using the following formula.
● Earnings before interest, tax, depreciation and amortisation (EBITDA): It shows the
cash-operating income of a company. It can be computed using the following formula.

EBITDA is a better indicator of cash-operating performance as compared to EBIT because of the

following reasons.

A balance sheet gives a snapshot of the financial position of a company at a particular point of time.
It has two sides: The Assets side and the Liabilities and Equity side.

● The assets side of the balance sheet consists of the following line items.

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The value of inventory must be the lowest of the purchase price or estimated market value as per
the ‘Prudence principle’.

● The liabilities and equity side of the balance sheet consist of the following line items.

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 ● When a company declares no dividend for a period, then,

● When a company declares dividend for a period, then,

After paying the dividend, the balance sheet of the company is still balanced.

The three financial statements are linked similar to the three ends of a triangle, and the resulting structure is
known as the financial triangle. This is because:

● The bottom line of the cash flow statement, ‘Cash at end’, is transferred to the asset side in
the balance sheet.
● The bottom line of the income statement, ‘Net profit’, is transferred to the owner's equity side
of the balance sheet.
In order to have a comprehensive view of the financial health of a company in any period, it is
important to analyse all the three statements.
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Typically, a business can be summarised as having the following framework.

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