how detailed do I have to know the Income Statement?

jason's picture
Rank: Baboon | 117

Nonfinance major prepping for IB interviews. I've been reading some income statements but they're all different. I could list them as:

A.
Revenue
COSG
= Gross Margin
R&D
SG&A
D&A
= Operating Income
Non Operating Income
= Income before taxes
Taxes
= Net Income

B.
Revenue
COSG
= Gross Margin
R&D
SG&A
= EBITDA
D&A
= EBIT
Interest payment
= EBT
Taxes
= Net Income

Why are there 2 systems of listing income statement? Which statement is the better answer to "tell me about the income statement?" Thanks!

Comments (5)

Sep 3, 2009

A lumps together non-operating income/expense (e.g. FX gain/loss) and interest expense, B doesn't explicitly break out non-operating income/expense. Between the two of them, A is more of a GAAP approach, assuming you add an additional line for interest expense, and is probably better for interviews. B, with non-operating inc/exp before EBITDA, is more relevant for actual modeling (personal preference, having EBITDA laid out).

Sep 3, 2009

Yea I was reading the WSO technical guide and its answer to "walk me through an income statement" was way too simplistic.

Also, Revenue - COGS = Gross Profit (not gross margin. gross margin is gross profit / revenue).

Sep 6, 2009

thanks for pointing that out. I've been browsing through a few sources and they have all different ways of trying to run through an income statement.
Just wondering for interviewing purposes, if anyone has a solid and universally acceptable way to run down an income statement.

I've been asked what's the difference between EBIT and Operating Income. Is it just that EBIT = Operating Income + Nonoperating Income?

Sep 7, 2009

The WSO technical guide gives too simple of an answer IMHO:
Revenues
-COGS
=Gross Margin (this is incorrect - it is gross profit)
-Operating Expenses
=Operating Income
-Other Expenses
-Income Taxes
=Net Income

I believe walking through an income statement should definitely include mention of SG&A, depreciation and amortization, and interest expense. However, I would shy away from using terms like EBIT and EBITDA where they might call you out on a specific line item and whether it is included. I would say the following (in accordance with google finance income statements):

-Top line is revenue or sales, subtract COGS and you get gross profit.
-Next you subtract SG&A, depreciation and amortization, interest expense, and other operating expenses to get operating income.
-From operating income, you adjust for non-operating expenses and income, as well as any gains/losses from extraordinary items, to get pre-tax income.
-Subtract taxes and you have the bottom line which is net income.
-Finally, you have EPS and diluted EPS.

Sep 8, 2009
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