Income Statement Glossary - FINAN I Unit 4

How to Use This Resource: This glossary defines the key terms you will encounter in the Chipotle Income Statement Analysis assignment. Keep it open as a reference while working through the case document and workbook.

An income statement tells you how much money a company made (or lost) over a specific period. It answers three questions: How much did we bring in? How much did we spend? What's left over?

This document defines the terms you'll encounter in the Chipotle case. Everything here is what you need to read an income statement and understand how a business makes money.

The Basic Structure

Try asking your LLM

Explain the difference between gross profit and net income using a simple lemonade stand example. Make up some numbers and make it really clear, I'm taking my first finance course.

Revenue: Money Coming In

Revenue: The total money a company receives from selling its products or services before paying any expenses. For a restaurant, this is money from selling food and drinks.
If a restaurant makes $100 million from food sales and $2 million from catering, total revenue is $102 million

Revenue Streams: The different ways a company makes money. Most companies have multiple sources of revenue. Breaking these out helps you understand what drives the business.
A coffee shop might have: drink sales (main revenue), food sales, merchandise, and licensing fees

Expenses: Money Going Out

Expenses are organized by what the money is spent on. Each category tells you something about how the business operates.

Cost of Goods Sold (COGS): The direct cost of making whatever you sell. For a restaurant, this is food, beverages, and packaging. For a manufacturer, it would be raw materials and factory labor.
Note: Many companies show COGS as a single line item. Chipotle breaks it into subcategories (Food, Beverage, Packaging) for more detail, but the concept is the same.

If a burrito costs $4.00 in ingredients and packaging to make, and you sell 1 million burritos, COGS is $4 million

Gross Profit: What's left after you subtract the direct costs of making your product. This shows how much markup you have to cover all your other expenses (labor, rent, corporate overhead, etc.).
Gross Profit = Revenue - Cost of Goods Sold

If you sell burritos for $10 and they cost $4 in ingredients, your gross profit is $6 per burrito

Labor Costs: Wages and benefits for employees who work in the stores or deliver the product. This is separate from corporate headquarters staff (that's G&A).
Store employees making burritos, running registers, and cleaning are labor costs. The CFO in the corporate office is G&A.

Occupancy Costs: Rent and related costs for the physical space: monthly lease payments, property taxes, utilities. The cost of having a building.
For a restaurant chain with 1,000 locations paying average rent of $5,000/month, annual occupancy is at least $60 million

Operating Expenses: The costs of running the business day-to-day, excluding the direct cost of making the product. Includes labor, rent, marketing, equipment, supplies, etc. Everything between gross profit and operating income.

General & Administrative (G&A): Corporate overhead: headquarters staff, executives, legal, accounting, IT systems. The costs of managing the company rather than operating individual stores.
The CEO's salary, corporate lawyers, and the finance team at headquarters are all G&A expenses

Try asking your LLM

I see a company made $10M in restaurant sales and $500K in delivery fees. Explain how to express delivery fees as a percentage of total revenue, and why using percentages is more useful than just dollar amounts for comparing companies. Give sample excel code. Be brief and clear.

Profit: What's Left

Income statements show multiple types of profit. Each one answers a different question about the business.

Operating Income: Profit from the core business operations, before accounting for financing costs (interest) or taxes. This shows whether the business model itself is profitable, regardless of how it's financed.
Operating Income = Revenue - All Operating Expenses

A company with $500M revenue and $400M in operating expenses has $100M operating income

Net Income: The final profit after absolutely everything: operating expenses, interest, and taxes. This is what the company actually keeps. Often called "the bottom line" because it appears at the bottom of the income statement.
Net Income = Operating Income - Interest - Taxes

If operating income is $100M, interest is $5M, and taxes are $20M, net income is $75M

Income Tax Expense: What the company pays to the government based on its profits. In the US, the federal corporate tax rate is 21%, though the effective rate companies actually pay often differs due to deductions, credits, and other factors.
A company with $100M in pre-tax income might pay anywhere from $15M to $25M in taxes depending on its specific tax situation

Interest Expense: Cost of borrowing money. Companies with significant debt pay interest to lenders. Companies with little or no debt have low interest expense. This appears "below the line" because it's a financing decision, not an operating performance metric.
A company with $500M in debt at 6% interest pays roughly $30M per year in interest expense

Key Metrics: Making Comparisons

Raw profit numbers don't tell you much without context. A $10M profit is great for a small company but terrible for a giant one. These ratios let you compare companies of different sizes or track performance over time.

Gross Margin: Gross profit as a percentage of revenue. Shows how much markup you have after direct costs. Higher is generally better, though what's "good" varies by industry.
Gross Margin = (Gross Profit / Revenue) x 100%

If a company has $100M revenue and $30M COGS, gross profit is $70M and gross margin is 70%

Operating Margin: Operating income as a percentage of revenue. Shows how efficiently the core business generates profit before financing and taxes. This is a key metric for comparing business models.
Operating Margin = (Operating Income / Revenue) x 100%

A 15% operating margin means the company keeps 15 cents of operating income for every dollar of sales

Net Margin: Net income as a percentage of revenue. Shows how much profit the company actually keeps after everything. This is the final profitability measure and the most commonly cited margin.
Net Margin = (Net Income / Revenue) x 100%

A 10% net margin means the company keeps 10 cents of profit for every dollar in sales

Profit Per Unit: How much profit a company makes on each thing they sell. Divide net income by total units sold. Useful for understanding economics at the transaction level and comparing efficiency across businesses.
Profit Per Unit = Net Income / Total Units Sold

If a restaurant makes $50M in profit and serves 30M meals, profit per meal is $1.67

Try asking your LLM

I calculated a restaurant's net margin and it's 11%. That sounds low, like they're barely making money. Am I thinking about this wrong? Help me understand what counts as a 'good' vs 'bad' net margin for a restaurant. I'm a student in an intro finance course.