R Tutorial: Pro-Forma Income Statements

Want to learn more? Take the full course at https://learn.datacamp.com/courses/financial-analytics-in-r at your own pace. More than a video, you'll learn hands-on coding & quickly apply skills to your daily work. --- The revenues and expenses from our business model are inputs to key financial line items found on an income statement. An income statement (sometimes called a “profit and loss” or “P-and-L” ) translates revenues and expenses to net income. This process creates a projected or “pro-forma” income statement for our project. In this lesson, we will discuss the key calculations required. We previously calculated gross profit. We can get to operating income by subtracting operating expenses from gross profit. For project valuations, we don’t need to consider SGA expenses like administrative salaries. Instead, we will focus on depreciation and amortization. What is depreciation? Some projects require large capital expenditures, like buying a machine. Depreciation distributes the cost of large, durable assets over their lifetime to match expense with use. For example, if a company purchases a new delivery truck, it will recognize depreciation during each period that the truck is used to generate revenue. There are many different methods of calculating depreciation and the choice is largely subjective. We will briefly look at one. Amortization is a similar concept for non-physical assets like patents or research&development. In straight-line depreciation, the per_period cost equals the net cost divided by the number of periods it will be used. The net cost is the original book value of the item minus its salvage value. Salvage value is the amount we can sell it for once we finish using it. As a numerical example, if we buy our truck for $50,000, plan to use it for 10 years, and think it can be sold for $10,000 at the end of that period, we would depreciate it by (50,000-10,000)/10 or $4,000 each year. Let's do this calculation in R. Here, we use the