The Daily Technical #36: Walk me through the three financial statements.

Good morning. Welcome to the 36th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What do the phrases “above the line” and “below the line” mean?

"The line" refers to operating income. It divides normal, ongoing business from non-operational items.

If a profitability metric is "above the line," it shows a company's performance. It excludes non-operational items like interest and taxes. Financing-related activities are an example of such non-operational items, as decisions on how to fund a company are discretionary (debt vs. equity). For example, EBITDA, or earnings before interest, taxes, depreciation, and amortization, is "above the line." It is often used for comparison because it shows performance, independent of capital and taxes.

In contrast, "below the line" profitability metrics have adjusted operating income. They account for non-operating income and expenses. These are discretionary items, unrelated to a business's core operations. An example is net income. Its ending value accounts for interest expense, non-operating income/(expenses), and taxes.

Common Mistakes

1. Mixing up what constitutes operational versus non-operational activities. Remember, operational items are core to the business, while non-operational ones, like financing and taxes, are not.

2. Using overly technical language to define "above" and "below the line." Instead, keep it simple: "above the line" focuses on ongoing activities, and "below the line" includes all income and expenses.

3. Not providing examples. Use examples like “EBITDA" for "above the line" and "net income" for "below the line."

Key Takeaways / TLDR

• "Above the line" reflects core operations; "below the line" includes non-operational items.

• Use clear, simple definitions to distinguish the metrics effectively.

• Practical examples like "EBITDA" and "net income" clarify and reinforce these concepts.

TODAY’S QUESTION
Walk me through the income statement.

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THAT’S A WRAP
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The HirePrep Team