[MUSIC] In this video, we will look at some of the common expenses a company incurs while generating revenues. Specifically, we will look at what cost of goods sold is and the different types of operating expenses. We will also present some of the intermediate profit measures calculated on the income statement. The first expense is cots of goods sold referred too as COGS. This refers to the direct costs a company incurs in generating a warehouse full of goods or products ready to be sold. This includes raw material costs and direct labor costs that go into the production of the final product. It does not include any distribution cost or sales force cost. Amazon reports COGS as cost of sales. The annual report notes that this includes the purchase price of consumer products, digital media content, packaging supplies, sortation and delivery centers. And related equipment costs, and inbound and outbound shipping costs. In summary, it includes all costs Amazon incurs in delivering its products to its customers. The first profit measure is the gross profit. This is the difference between the companies revenues and its COGS. It tells us how much a company makes in profits after deducting the cost directly associated with producing and selling its product or the cost directly associated with providing services. Amazon's net sales in 2015 were $107.01 billion and its COGS was $71.65 billion. Directing COGS from its net sales Amazon's gross profits or gross income for 2015 were $35.36 billion. Next, the income statement contains various operating expenses which are deducted from the company's gross profits. The major component of operating expenses is selling, general, and administrative expenses, refered to as SG&A. This is a non-production cost and typically includes all selling expenses related to selling the company's products like advertising expenses, rent and salaries of the sales force. All executive salaries and cost of general support are also part of SG&A. Finally, any general operating expenses are also included in SG&A. Another key component of SG&A is depreciation and amortization expense. Remember, we talked about expensing and capitalization last time. Depreciation and amortization expense occurs when the cost of acquiring an asset is capitalized because the benefits from this asset are realized over a number of years. Rather than only in one year it was acquired. The number of years over which the cost of the asset is spread over is referred to as its useful life. However, one thing to note here is that unlike other expenses on the income statement. Depreciation and amortization expense is not an amount that is paid out to someone. Hence the depreciation and amortization expense is a non-cash expense. Depreciation is the expense related to PP&E and other fixed assets. Where as amortization is the expense related to intangible assets like goodwill, trademarks, brand-names, etc. On Amazon's income statement SG&A consists of fulfillment, marketing and general and administrative expenses. Its annual report states that fulfillment primarily includes costs. Amazon anchors, and operating and staffing its fulfillment and customer service centers, as well as its payment processing centers. For 2015, this was $13.41 billion for Amazon. Marketing expenses are costs incurred by a company in marketing and selling its products and services. Amazon incurred marketing expenses of $5.25 billion in 2015. The last part of SG&A is general and administrative expenses. This includes payroll expenses, professional and litigation expenses other corporate cost as well as depreciation expenses. Amazon's general and administrative expenses for 2015 were $1.75 billion. This gives Amazon's total SG&A for 2015 to be $20.41 billion. However, one thing to note is that Amazon's income statement does not state its depreciation and amortization separately. It is implicitly captured under different components of SG&A. Amazon's statement of cashflows reports its depreciation and amortization expenses to be $6.28 billion for 2015. Companies incur cost on research and development in developing new products and services. This appears as technology expenses on Amazon's income statement for 2015. Amazon's annual report states that technology costs include payroll and related cost for employees involved in application, production, maintenance, operation and platform development as well as technology infrastructure expenses. Amazon also include content cost which include payroll and related expenses for employees involved in category expansion, editorial content, buying and merchandising selection. These technology and content costs total $12.54 billion for Amazon in 2015. Once we add in the technology and contents cost, and other operation expenses of $0.17 billion to SG&A of $20.41 billion. Amazon's total operating expenses for 2015 were $33.12 billion. Subtracting these operating expenses from Amazon's gross profit of $35.36 billion gives us Amazon's operating profit in 2015 to be $2.24 billion. Operating profit is also referred to earnings before interest and taxes. These are the company's profits before any interests and taxes are paid. Another commonly mentioned profit measure is EBITDA, which stands for Earnings Before Interest Taxes Depreciation and Amortization. To get this, we will simply add depreciation and amortization expenses to EBITDA. For Amazon, EBITDA in 2015 was $2.24 billion plus $6.24 billion which gives us $8.48 billion. This is a relevant number as depreciation and amortization expenses and non-cash a expense. Hence, this is a more relevent number in terms of profits made by the company. [MUSIC]
