[MUSIC] We will continue to use Amazon's financial statements from its 2015 year-end annual report. In this video, we will define the income statement. We will also distinguish between expensing and capitalizing. Finally, we will talk about the first item on the income statement, namely, revenues or sales. The income statement is also referred to as profit and loss statement. It reports a company's operating results for the period, which largely includes its revenues and costs. Amazon's annual report refers to the income statement as consolidated statements of operations. The income statement is of interest to analysts, investors, and potential investors, as it tells them how profitable a company is. In a nutshell, a company's net income, which is also called profit or loss, Is its revenues minus all expenses. We will look in greater detail at what constitutes these revenues and expenses. Before we start looking at the various items on the income statement, we will discuss the difference between expensing and capitalizing. Assets and expenses are two sides of the same coin. Both require the use of a company's resources. However, if the benefits of the use of these resources result in the same period as the use itself, then the use is categorized as an expense. The entire amount used appears on that period's income statement. However, if the benefits of the use are expected to accrue in future time periods when compared to when the resources are used, then the use is capitalized. This means that the entire amount used is shown as an asset on the balance sheet. Examples of such capitalized expenditures are plant, property, and equipment, PP&E, purchased patents and trademarks. The capitalized expenditures are eventually charged as expenses to the income statement through two different processes. One is amortization, two is impairment. Amortization is the process of allocating an asset's value to those future periods when its benefits are expected to be earned, typically over the asset's useful life. For example, if an asset's useful life is five years, then one-fifth of the asset's value will be charged as an expense during each of those five years. The most common example of amortization is depreciation, which is terminology used for amortizing planned property and equipment. In certain circumstances, market forces or nature may destroy substantial parts of an asset's value. In such a case, we write down the value of the asset to its current fair value, that is, its market value, through a process of impairment. The amount of impairment is charged as an expense during the period when the value destruction occurs. Note that amortization is a periodic charge that occurs every period over the asset's life. While impairment is a one-time event. Moving on to the income statement, its first item is revenue or sales. It is also called a top line as its first item on the income statement. Revenues include only income from the company's primary lines of business or operations. It excludes income from other sources like investments. These will be reported later in the income statement. Looking at Amazon's income statement at the end of 2015, it had net product sales of $76.27 billion and net server sales of $27.74 billion. Net means that these revenues are net of any returns and net of any discounts offered to customers. Amazon's annual report states that net product sales are those realized from selling its own inventory. Net service sales are largely Amazon's share of revenue of items sold by third-party sellers. Taken together, Amazon's net sales revenues for 2015 was $107.01 billion. Next time, we will start looking at the various expenses a company incurs in generating these revenues. [MUSIC]
