Unformatted text preview: nd credit the way it
was paid (as in the checking balance or cash) or not paid (as in Accounts Payable). • An increase in an asset is always a debit. An increase in a liability is always a credit. • An increase in capital (for example, a new investment) is always a credit. A new investment is
a credit to capital and a debit to the checking account. Three Main Statements
Most ﬁnancial analysis, including the ﬁnancials in a standard business plan, revolves around three
main statements. Two of them, the Income Statement and Balance Sheet, put to use the basic ﬁnancial
building blocks from the previous section. The third, the Cash Flow, brings the other two forward from
accounting semi-ﬁction to the real world of actual money. Pro Formas
Elsewhere in this book we discuss the huge difference between planning and accounting. With the
three main ﬁnancial statements, speciﬁcally, ﬁnancial analysts use the term pro forma to describe
projected statements, projections, and predictions. An Income Statement, for example, is about past
results. A pro-forma Income Statement is a projected income statement. The Income Statement
The Income Statement is also called Proﬁt and Loss. People often refer to the bottom line as proﬁts,
the bottom line of the Income Statement. It has a very standard form. It shows Sales ﬁrst, then Cost of
Sales (or COGS, or Cost of Goods Sold, or Direct Costs, which are essentially the same thing). Then
it subtracts Costs from Sales to calculate Gross Margin (which is deﬁned as Sales less Cost of Sales).
Then it shows Operating Expenses, usually (but not always) subtracting Operating Expenses from CHAPTER 14: ABOUT BUSINESS NUMBERS 14.5 Gross Margin to Show EBIT (Earnings Before Interest and Taxes). Then it subtracts Interest and Taxes
to show Proﬁt.
Sales – Cost of Sales (or COGS, Cost of Goods Sold, or Direct Costs) = Gross Margin
Gross margin – Expenses = Proﬁts Notice that the Income Statement involves only four of the seven...
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