9. Combining Income Statements Part 1

Overview

In this lesson, we combine income statements for both the target and the acquirer. We also learn how to include the impact of synergies on our revenues and costs.

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Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to combine the Income Statements for the target and the acquirer and calculate the combined EBIT.

  2. Calculating Combined Revenue (00:13)

    To create a combined Income Statement, we add the relevant values from both individual Income Statements, then add the amounts gained from synergies. For example, to calculate combined revenue, we add revenue from the individual Income Statements, then add the revenue synergies that we calculated previously.

  3. Calculating Gross Profit (01:22)

    To calculate Gross Profit, we need to calculate the combined Cost of Goods Sold for both companies. To do this, we first add the Cost of Goods Sold from the individual Income Statements. We then subtract the COGS synergies, as these will reduce the combined Cost of Goods Sold. Then we add the Cost of Goods Sold from revenue synergies. To calculate this, we multiply the revenue synergies by one minus the gross margin on revenue synergies, which is found in the transaction assumptions.

    After calculating the combined Cost of Goods Sold, we subtract this from combined total revenue to calculate the combined Gross Profit. We can also calculate the combined Gross Margin by dividing Gross Profit by combined total revenue.

  4. Calculating Combined EBIT (03:26)

    To calculate EBIT, we calculate the combined operating expenses. We add all the operating expenses for both individual companies, then subtract the Opex synergies that we calculated previously. This gives us our combined total operating costs. Subtracting these costs from Gross Profit gives us the combined Earnings Before Interest and Tax, or EBIT.

Transcript

With our sources and uses table now created, we're going to create a combined income statement including values for the acquirer and the target. As you can see as I scroll down through this template, you have gray lines that indicate synergies or costs associated with the transaction and various entries for the acquirer and the target, for expenses and also for revenue. Let's start by filling in our combined total revenue starting with the acquirer. And I'll skip to the tab and find revenue.

And I'll do the same for the target.

And then I'll include revenue synergies which can be found in the Synergies tab and I'll add these together before copying across for the remaining cells.

And this gives me total revenue.

To save some time, I'm going to off camera include all the costs directly from the Acquirer and Target tabs in my spreadsheet.

We'll begin by calculating our cost synergies and again these can be taken from our Synergies tab but be sure to include a minus sign 'cause we'll want to subtract this from the total costs of goods sold.

And again we'll copy across. Next up we've COGS from revenue synergies and these are basically cost of goods sold from this line item in our spreadsheet and this is a very easy calculation. I'll simply take the revenue from these synergies and multiply it by one minus the gross margin which is in cell E20 and then I'll copy across for the remaining cells and I'll just make sure that I anchor E20.

There we go and now we can calculate total cost of goods sold.

Once we have cost of goods sold we can calculate gross profit.

So, I'll revenue and subtract cost of goods sold and indeed we can also calculate gross margin by dividing gross profit by total revenue.

And as you might expect, our gross margin is higher than the gross margin that Shirt Shop had as a single entity because we're adding in target revenue and target cost of goods sold which is the gross margin of about 60%.

Now let's move onto operating expenses and again, I simply need to add operating synergies here and I'll make sure to include a minus sign 'cause these will be subtracted 'cause they're a cost saving and then add in my value and of course I'll copy across for the remaining cells.

I can calculate total operating costs and copy across before calculating EBID or operating income which will be gross profit minus total operating costs.

We've almost completed our combined income statement. We still need to calculate the net interest, income and expense and our tax provision and I'll do this in the next lesson.