- Hey, any idea what Microsoft's margins were last year?
- (laughing) Which margins are you talking about?
- Wait, there's more than one?
- Yeah, there's more than one.
- Well what about Microsoft's profit?
Do you know what that was last year?
- Profit, I mean which one?
- What, there's more than one of those?
- Yeah. - Okay, simple question:
what about Microsoft's net income?
Do you know what that was last year?
- Now income, there are lots of different incomes.
- Oh, I thought these were simple questions.
Profit, margin, income, aren't these terms
all after the same thing?
How well a company is doing?
- Well those terms are all after the same thing,
but they're not the same exact thing.
Sometimes the terms are used interchangeably
so it makes things a little confusing.
- Okay, I'm confused.
- I'm not surprised, that certainly doesn't surprise me,
but let's see if we can clear things up for those watching.
Here's Microsoft's income statement for the year-end
in June 30th, 2018.
Pretty typical income statement.
- [Man In Blue Shirt] Okay, I see terms gross margin,
operating income, income before taxes, and net income.
Now when companies refer to their income,
which one of these are they referring to?
- [Man In Pink Shirt] Well most of the time when a company's
referring to their income, they're referring
to the net income, often called the bottom line,
because, you know, well it's on the bottom
of the income statement.
Microsoft then reports what's called operating income.
- Let me guess, this is the amount of income
that Microsoft generates from its operations,
hence the name.
- Yeah, exactly, you're getting this now.
Sometimes you might hear the subtotal referred to
as operating profit.
This term represents the amount of resources generated
from what the business is in the business to do.
For Microsoft, that's the amount of resources generated
from selling Xboxs, cloud computing, and software.
- [Man In Blue Shirt] And after operating income
or operating profit comes income before income taxes.
What's the difference between operating income
and income before taxes?
- [Man In Pink Shirt] That's a good question.
This difference is usually all the revenues,
expenses, gains and losses, unrelated
to the actual day to day operating of the core business.
- Ahh, things like interest earned on investment
or interest paid on loans.
- Yeah, and things like selling long term assets
or selling entire product lines.
These items don't happen on a daily basis.
In other words, they're not part of the business,
core business, but they do generate
or use some kind of profits.
- [Man In Blue Shirt] So now we're down to net income.
I think I got this one:
the difference between income before income taxes
and net income is the amount of taxes
owed by a company to various governmental agencies.
- Correct, correct.
Taxes are a cost of doing business,
but they're not related to a company's core operations
and they're not related to a company's
peripheral business activities.
- [Man In Blue Shirt] So, let's summarize
the lessons learned here.
The terms profit, margin, and income
can be used interchangeably, so be careful.
- When reading an article in the business press
or talking with somebody about a company's performance
and you hear or read the term income,
you need to ask which income are you talking about?
- Until you know to which income term they're referring,
it's difficult to know how to interpret the number
and how to use it for comparability purposes.
- So be careful.