Finances can be tricky to understand, but it is very simple and easy to perceive withÂ EBIT EBITDA homework solutions.
There are two financial terms in EBIT EBITDA. EBIT EBITDA can be understood by partitioning the characters and understanding the meaning of each one deeply.
- EBIT – Earning Before Interest and Taxes
- EBITDA – Earning Before Interest, Taxes, Depreciation and Amortization
Now, let’s understand the each term asÂ EBIT EBITDA homework solutions explains the best way possible. EBIT is pretty self explanatory as the words say “earnings before interest and taxes”. It means whatever the profit amount is there; it has been calculated without any form of calculated tax applied to it. Whereas EBITDA, explains itself by “Earnings before Interest, Taxes, Depreciation and Amortization”. Here the profit amount is calculated even before the values of Depreciation and Amortization.
Real life examples can explain the words Depreciation and Amortization in better ways.
Each and every item has its life span. Let’s take example of a car. Suppose, one bought a car and sold it after 10 years of usage. Now, in these ten years, car asks for fuel, service cost, maintenance cost etc. All the cost spent on the car for ten years is considered as Depreciation. It is counted on tangible assets.
As a life of car decreases, it has low profit on sell. But, it may not be always the case. When someone buys a house or a building for example, the value of item will be increased over a time period of decade, even after calculating the Depreciation value.
Amortization cost is counted on intangible assets. For example, one has a patent for spice, and holds it for 15 years. The cost goes in preparing it over the years is Amortization. If you want to look at real example, KFC chicken spice has patent, Coca-Cola formula is also patented.
Why is it necessary to put numbers about EBIT EBITDA?
As explained byÂ EBIT EBITDA homework solutions in a descriptive way, both Amortization and Depreciation are non-cashless expenses. So, if these expenses are unrecorded company may suffer financial loss. Suppose, there is start-up company which wants to reach on the top and does not want to spend time, money or other resources to record small expenses like, stationary. 20 years down the road, what can be expected from company’s account?
- Unrecorded finances
- worried owner who does not know where the money is going
- Effected valuation of company
As we have understood the meaning of terms, it is time to take a good look at EBIT-EBITDA – Earn before Interest, Taxes, Depreciation and Amortisation.
Details about EBIT EBITDA
EBIT-EBITDA is noted in a well informative way in financial records of a company. Investors use these data to differentiate the profit values of company. There is no legal policy about EBIT-EBITDA but, it is commonly accepted according to the standards of “Generally Accepted Accounting Principles” or GAAP. It is not must for companies to show their financial data about EBIT-EBITDA.
The income statements of company, demonstrates the earnings, tax and interest numbers. Whereas Depreciation and Amortization can be easily found on cash flow statement.
Cash flow often conflated with EBITDA. On the contrary operating income can be used with EBIT in financial reports.
How EBIT EBITDA came?
In mid-1980, intelligent investors came to know about some distressed companies that needed very high quality of financial restructuring. In order to understand the worth of company something was needed from accounting point of view. To determine if the companies could pay back or not.
If the company can payback the bankers back, it was essential to calculate within how much time. So, EBIT EBITDA tool was used to determine the EBITDA-interest to coverage ratio. The interest to coverage ratio of EBITDA gives the financial sense about the company that weather the company will be able to pay the heavy payments after restructuring or not.
How “Earnings before Interest & Tax” andâ€ Earnings before Interest, Tax, Depreciation and Amortization” has evolved over the time?
It is becoming a common trend in the company to use these financial calculation tools in order to know shrink the expenses and maximize the net profit. Companies are being transparent about their financial data to reflect their company strength to investors.
Previously, calculation of interest was totally ignored and tax was also being left out. And that impacted on the next owner who purchases the company. But, in this fast era,Â EBIT EBITDA homework solutions, strips down the financial boundaries and educates the students and companies regarding financial problems for better financial health.
Things that are need to be taken care about EBIT EBITDA
Even though, EBIT EBITDA are good financial tools for calculating profit and loss statements, few things need to be taken into account.
- Companies may appear cheaper than they actually are.
- Sometimes, it neglects the quality earning amount.
- It becomes false data when companies do not pay government taxes.
It is a widespread use of EBIT EBITDA nowadays. But, there is no perfect definition of it in GAAP – General Accepted Accounting Principles. On top of that, it does not give total overview of company. So, it is advisable to be using it with care.
Finance and accounting is all about profit and loss of money if said broadly. But, in order to understand the meaning of each and every word, in a way that it can be archived forever in the memory, EBITEBITDA homework solutions is the way to go.