Confused with Depreciation and Amortization
Hi there,
I am an undergrad and am having some difficulty understanding how Operating Income (EBIT) corresponds to EBITDA - my largest confusion is how Depreciation and Amortization function within the CF statement and Income statement. I looked at some YouTube videos but it wasn't clear.
Here is an example:
-Revenue: $100
-COGS: $50
-Gross Profit: $50
-OPEX of S&M, G&A, R&D: $20
-Operating Income (EBIT): $30 ($50 minus $20).
Now do I go to the cash flow statement and get Depreciation and Amortization to add it to EBIT to get to EBITDA? Should Depreciation and Amortization be clearly labeled in the income statement as well?
Thanks for your help.
D&A is pulled from cash flow statement when you're trying to go from EBIT to EBITDA. Reason you don't use income statement numbers is because some depreciation expenses are embedded in COGS, which means any explicit depreciation expense on the income statement is likely understated. D&A doesn't need to be explicitly labeled on the income statement. It's usually accounted for in the OpEx or SG&A section. The D&A number will always be on the cash flow statement because you need those exact numbers to flow from net income to cash flow from operations.
Thank you for the thorough explanation. I was wondering why sometimes Depreciation and Amortization is explicitly stated on the income statement and why sometimes it is not?
As a seperate question, in instances when it is not stated explicitly on the income statement, I've seen income statements compiled where you arrive at EBITDA by simply doing Gross Profit minus OPEX (which is usually the formula to arrive at EBIT aka Operating Income. In this instance should I assume that D&O is effectively already accounted for in COGS? I wouldn't then need to go to the CF statement and also add back D&O?
Typically, it just comes to down to complexity of financial reporting. It takes time and money to even figure out and report these numbers. Bigger companies would prefer to keep their statements at the highest level breakdown as possible, and then plug the other key figures in the notes to financial statements or schedule sections of 10-K. I'm not sure what source told you that EBITDA is GP-OpEx. That would only hold up if D&A is 0. Otherwise, that formula is incorrect. You would have to add back the D&A number from the cash flow statement if there was one.
Thanks! That's where my confusion comes from. Assuming D&A is specified in the income statement, that would fall under OPEX, correct?
My understanding is EBIT (Operating Income) is calculated as Gross Profit minus OPEX, right?
My confusion stems from if you have an income statement where D&A isn't stated should you simply calculate EBIT (Gross Profit minus OPEX) and then add back D&A from the CF statement to arrive at EBITDA?
Yes to all your questions. I think you have the concept down. Just look for EBIT or operating income or operating profit on the income statement and then find D&A in cash flow from operations in the cash flow statement. Add them together and you get EBITDA
Thanks everyone. Very helpful!
Revenue - COGS - Opex = EBITDA only if COGS / OPEX exclude D&A. Would start from operating income, add back any one-time adjustments / SBC to get to Adj. EBIT, and then add D&A on the CFS to get to Adj. EBITDA.
I am looking at an income statement that is laid out really strangely. Does this make sense to you?
-Net Revenue: $65,281
-COGS (ex. D&A): $50,806
-Gross Profit: $14,475
-SG&A: $4,728
-EBITDA: $9,747
-D&A: $2,836
-EBIT: $6,911
I'm just used to seeing EBIT listed above EBITDA and not having EBITDA simply being Gross Profit minus OPEX.
Yep, looks normal to me. It's clear from the above they are breaking out D&A as a separate line item that is not embedded within COGS / Opex, so you first arrive at EBITDA before subtracting D&A to get to EBIT. Keep in mind that this isn't obviously a GAAP income statement, which is why you see EBITDA / EBIT in the first place.
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