[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 under income statement. The first expense is cost of goods sold, referred to as COGS, C-O-G-S. 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 costs or sales force costs. Amazon reports COGS as Cost of Sales. It had $17.65 billion in cost of sales in 2015. The annual report notes that this includes the purchase price of consumer products, digital media content, packaging supplies, sortation and delivery centers. And related equipments 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 company's revenues and it's COGS. It tells us how much a company makes in profits after deducting the costs, directly associated with producing and selling it's product. Or the cost directly associated with providing services. Amazon's net sales in 2015 were $107.01 billion, and it's COGS were $71.65 billion. Deducting COGS from it's 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, referred 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 costs of general support are also part of SG&A. Finally, any general operating expenses are also included in SG&A. Under the 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 realised 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 it's 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 P, P and D and other fixed assets. Whereas amortization is the expense related to intangible assets like goodwill, trademarks, brand names, etc. On Amazon's income statement, SG&A consists of fulfilment, marketing, and general and administrative expenses. Its annual report states that fulfilment primarily includes costs Amazon incurs in operating and staffing its fulfilment and customer service centers. As well as its payment processing centers. For 2015, this was $13.41 billion for Amazon. Marketing expenses are cost incurred by a company in marketing and selling it's 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 costs, 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 expense separately. It is implicitly captured under the different components of SG&A. Amazon's statement of cash flows, reports it's depreciation and amortization expenses to be $6.28 billion for 2015. Companies incur costs 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 costs for employees. Involved in application, production, maintenance, operation and platform development, as well as technology infrastructure expenses. Amazon also incurred content costs, which include payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. These technology and content costs totaled $12.54 billion for Amazon in 2015. Once we add in the technology and contents costs 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 $35.6 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 interest and taxes are paid. Under the 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 EBIT. 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 is a non cash expense. Hence, this is a more relevant number in terms of profits made by the company. Next time we will look at the remaining part of the income statement, and a few other profit measures. [MUSIC]
