IB Interview Questions: Accounting : Part -2

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In continuation to : IB Interview Questions: Accounting

The Income Statement

1. What is included in COGS?

Cost of Goods Sold (COGS) includes all expenses incurred to produce a good or service, such as raw materials and labor.

2. What is included in OpEx?

Operating Expense (or ‘OpEx’) is simply another name for Selling, General and Administrative (‘SG&A’) expense. OpEx includes all of the indirect expenses needed to run a business that aren’t directly tied to the products or services a business sells. OpEx typically includes overhead costs as well as marketing and selling expenses.

3. What is the difference between Cost of Goods Sold (COGS) and Selling General and Administrative (SG&A) Expense?

COGS expense reflects all of the expenses required to produce the goods or services sold by a Business.

SG&A expense reflects all overhead costs not directly tied to the production or delivery of the goods or services sold by a Business. SG&A also includes the sales and marketing costs.

4. How does Gross Profit differ from Operating Profit at a pizza shop?

Gross Profit is the money received for all Pizzas sold less the cost of dough, sauce, etc. Operating Profit goes a step further and subtracts the cost of marketing and sales as well as overhead items like rent and employee salaries.

5. What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a profit metric that is often called a ‘Cash Flow Proxy’ because it excludes non-cash charges like Depreciation and Amortization.

6. What does ‘Above the Line’ / ‘Below the Line’ mean?

‘Above the Line’ includes all Income Statement items above EBIT (including EBITDA).

‘Above the Line’ metrics reflect the core operations of the business independent of the impact Interest Expense from Debt.

These metrics are common in IB because bankers advise on buying/selling companies (and wipe out Debt/Equity in the process) and/or recapitalizing Debt/Equity, so they look at companies absent the impact of Debt.



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