Operating Profits Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

Voiceover: What I want to do in this video
is to see if we can understand
all of the different parts of kind of
a traditional income statement.
As we get into more and
more complicated examples,
you'll see more and more
complicated income statements,
but this is a good start.
What I've done here is
I've drawn the income statements
for actually two businesses.
One is Ben's Shoes, and
one is Jason's Shoes.
I did that because
these are fundamentally the same business,
but they have a slightly
different capital structure,
and we'll talk about what that means
in a second,
but they're both shoe stores.
They literally, they buy shoes
from shoe manufacturers.
They put them on their shelves,
and then customers come
in and buy those shoes.
The first line,
we're pretty familiar with it already.
This is the revenue,
this is the sales for
each of these shoe stores.
In the case of a shoe store,
it's literally just
going to be a measure of
the cash that the customers are paying
for the shoes.
You wouldn't have something like
accounts receivables,
where people can pay months later.
Most of it will just be cash.
Cost of goods sold,
in this example,
we're just going to assume it to be
the actual cost of a shoe.
If I sold a pair of $100 shoes,
but I had to pay $50 to
the shoe manufacturer
for those shoes,
that $50 would be the cost of goods sold.
So this $100,000 is actually the cost
of the $200,000 in sales.
Then when you just take
the cost of goods sold
from that revenue,
you get something called gross profit,
and really, the focus of this is is,
of this video is to
try to understand the difference between
gross profit, operating profit,
pre-tax income, net income.
Gross profit is the first time
that you kind of think of profit,
and the reason why it's called "gross"
is because we've just
thought about the profit
from selling that incremental shoe,
and sometimes some other
costs are thrown in there.
Sometimes advertising,
sometimes some other cost associated
with the store,
but for this example,
it's just the profit straight from selling
that incremental shoe,
and that's why we call it gross,
since we haven't taken
out other things yet.
Then, below that line,
we have all of the other expenses,
the expenses associated
with running the store.
The kind of the overhead
of running that store,
So we have the rent,
you have the salaries,
you have the depreciation
and amortization.
Maybe you're depreciating the cost of
your cash register and the shelves,
and whatever else,
and then you can have other things
like utilities,
and you can see both Ben's Shoes
and Jason's Shoes are completely identical
up to this point.
They have the same revenue, gross profit,
even the same expenses.
And so when you take all
of these expenses out
from the gross profits,
you take 100,000 minus all of these,
and I've written all of
the stuff you subtract
with parentheses around them,
so that these are expenses,
these are negatives.
You get the operating profit,
and you see that both of these are
the same number.
What operating profit tells you
is how much profit is
coming from the business.
It's before we think
about how the business
is structured.
It doesn't think about
things like interest income
from your bank account,
or interest expense on any loans you have.
It's from the business itself,
operating profit,
and since these are identical businesses,
they have the same exact operating profit.
Where they start to
diverge is below that line.
Above this line right over here
is the income statement,
down here is the balance sheet.
Their balance sheets are identical,
except for Jason's Shoes
has $100,000 in debt,
and Ben's Shoes has no debt.
Ben has no interest expense,
while Jason does have a
$10,000 interest expense,
so it's about 10% per year.
That's why these two income statements
start to diverge,
but notice, we didn't
put this expense up there
because it has nothing to
do with the operations.
It's dependent on how the operations
were financed.
Once you subtract that out,
then you actually have
your pre-tax income,
and if we assume that
we have to pay taxes,
this is how much we pay in taxes,
and this is actually the net income
that goes to the owners of the company.