The café sells ₩10,000,000 of drinks and earns ₩800,000
A fictional café run by a company sells 2,000 drinks at ₩5,000 each during one month: 2,000 × ₩5,000 = ₩10,000,000. This sales amount is revenue. The price excludes VAT, a tax on sales, and there are no discounts or returns. These are made-up figures, not typical café earnings.
The company records these sales as earned in its accounts; accountants call that recognizing revenue. A customer may pay later, so recording revenue does not necessarily put the same amount in the bank that month. We will trace that difference after following the costs.
Ingredients and other costs assigned to the sold drinks total ₩4,000,000. These are the cost of sales. Subtract them from revenue and ₩6,000,000 remains, called gross profit. This is an intermediate result: staff, premises and equipment costs still need to be reflected.
Those other operating expenses are ₩2,400,000 for staff, ₩1,200,000 for rent and ₩900,000 for other items. Together they are ₩4,500,000. Deducting them from gross profit leaves operating profit of ₩1,500,000. The other-items amount already includes ₩300,000 of depreciation for equipment in use. Depreciation divides an equipment purchase cost over the periods when it is used, rather than recording the entire cost in one month. It is not another cash payment. Staff costs and depreciation must not be subtracted again after this total.
The table continues from operating profit to profit before tax by subtracting interest, the cost of using borrowed money. It then subtracts income tax expense to reach net income, the final profit after these items. The profit lines are stages of one calculation, so adding them together would count the same profit more than once. On a narrow screen, scroll the table sideways to see every column.
| Line | Amount | How this example gets there |
|---|---|---|
| Revenue | ₩10,000,000 | Drinks sold and recognized as revenue |
| Cost of sales | ₩4,000,000 | Subtract from revenue |
| Gross profit | ₩6,000,000 | Revenue less cost of sales |
| Operating expenses | ₩4,500,000 | Staff, rent and other operating expenses |
| Operating profit | ₩1,500,000 | Gross profit less operating expenses |
| Interest expense | ₩500,000 | Subtract below operating profit in this model |
| Profit before tax | ₩1,000,000 | Operating profit less interest |
| Assumed income tax expense | ₩200,000 | 20% of the positive profit before tax |
| Net income | ₩800,000 | Profit before tax less tax expense |
Interest of ₩500,000 reduces profit before tax to ₩1,000,000. We then assume a flat 20% income tax expense, or ₩200,000, leaving net income of ₩800,000. That 20% is invented for the arithmetic. It is not a current Korean tax rate or a method for calculating a tax return.
This simplified statement assigns expenses to specific lines. A real company's presentation depends on its activities and accounting rules. For example, staff costs can be part of production costs rather than the separate operating-expense line used here. Those classifications matter when comparing companies.
EBIT means earnings before interest and tax. Check which items a financial website includes in its EBIT figure; it need not match the company’s reported operating profit.
More sales can leave less profit on every won
The next period brings ₩12,000,000 of revenue, but the cost of sales and other operating expenses each rise to ₩5,400,000. These are assumed totals, not real business results. Before reading the table, note that a margin asks how much of sales remains as profit: divide operating profit by revenue for operating margin, or net income by revenue for net margin. Neither is the percentage increase in sales.
| Period | Revenue | Cost of sales | Operating expenses | Operating profit | Net income | Operating margin | Net margin |
|---|---|---|---|---|---|---|---|
| First period | ₩10,000,000 | ₩4,000,000 | ₩4,500,000 | ₩1,500,000 | ₩800,000 | 15.00% | 8.00% |
| Next period | ₩12,000,000 | ₩5,400,000 | ₩5,400,000 | ₩1,200,000 | ₩560,000 | 10.00% | 4.67% |
Subtracting the two cost totals now leaves operating profit of ₩1,200,000. The extra sales brought in less than the extra costs took away. After ₩500,000 interest, profit before tax is ₩700,000; the assumed ₩140,000 tax expense leaves ₩560,000. Revenue rose 20%, while operating profit fell 20% and net income fell 30%. These percentages describe different starting amounts.
To calculate sales growth, compare sales with the earlier sales figure. To calculate profit growth, compare profit with the earlier profit figure. Each percentage needs its own starting amount.
A margin divides profit by revenue. The first operating margin is ₩1,500,000 ÷ ₩10,000,000 = 15%; the next is 10%. That is a decline of 5 percentage points, the subtraction of one percentage rate from the other. The next net margin is ₩560,000 ÷ ₩12,000,000 = 4.666…%, displayed as 4.67%. A sales-growth headline alone leaves this change out.
The second period's revenue does not tell us how many drinks were sold. More customers, a higher price or a different product mix could produce that total. Nor does a narrower margin by itself establish that the café is in trouble: a temporary hiring or training expense can have a different implication from a persistent rise in ingredient costs. You need the explanation of the costs as well as their totals.
Borrowing costs and an asset sale change the bottom line
Keep the original ₩1,500,000 operating profit and change one item at a time. The first case raises interest, the cost of borrowing, to ₩2,000,000. The second keeps the original interest but adds a ₩2,000,000 disposal gain. A disposal gain is profit from selling an asset after its recorded value and relevant selling costs are deducted; it is not all the money received. These are independent cases, not consecutive events.
| Case | Operating profit | Interest expense | Disposal gain | Profit before tax | Assumed tax expense | Net income |
|---|---|---|---|---|---|---|
| Original period | ₩1,500,000 | ₩500,000 | ₩0 | ₩1,000,000 | ₩200,000 | ₩800,000 |
| Higher interest expense | ₩1,500,000 | ₩2,000,000 | ₩0 | −₩500,000 | ₩0 | −₩500,000 |
| Separate one-off disposal gain | ₩1,500,000 | ₩500,000 | ₩2,000,000 | ₩3,000,000 | ₩600,000 | ₩2,400,000 |
Interest of ₩2,000,000 exceeds the operating profit, leaving a ₩500,000 loss before tax. Selling drinks is still profitable on the operating calculation, but borrowing costs make the final result a loss. We assume zero tax expense here, with no deferred tax—tax effects recorded across different periods—credits or other tax adjustments. A real company’s loss does not always make its tax expense zero.
In the disposal case, a separate ₩2,000,000 gain takes profit before tax to ₩3,000,000 and net income to ₩2,400,000. A disposal gain is what remains from the sale proceeds after subtracting the asset's carrying amount, meaning its value in the accounts, and relevant selling costs. It is not the total money received from the buyer. This model places it outside operating profit.
The disposal case increases the final profit without changing the profit from running the café. The asset sale happens once; it cannot simply be assumed to recur each month with drink sales. A higher net-income number needs an explanation of where the gain came from.
₩800,000 of profit can accompany a ₩2,700,000 cash decline
Use the original profitable period again, without either separate case above. The café begins with ₩5,000,000 in its bank account. Customers pay ₩8,000,000 of the month's ₩10,000,000 revenue; ₩2,000,000 remains receivable, meaning customers still owe it to the café. There are no collections from earlier periods.
The company pays all ₩4,000,000 of the cost of sales. Its operating-expense payments are ₩4,200,000, because the ₩4,500,000 recorded expense includes ₩300,000 of depreciation with no payment this month. Interest and tax are paid in full as recorded, without claiming that this is an actual tax-payment schedule. There are no changes in stock held for sale, unpaid bills or other timing differences. At month-end it also pays ₩1,200,000 for new equipment and repays ₩600,000 of an existing loan.
| Balance or movement | Amount |
|---|---|
| Opening cash | ₩5,000,000 |
| Customer receipts | ₩8,000,000 |
| Cost-of-sales payments | −₩4,000,000 |
| Operating-expense payments | −₩4,200,000 |
| Interest paid | −₩500,000 |
| Tax paid | −₩200,000 |
| New equipment paid for at month-end | −₩1,200,000 |
| Existing loan principal repaid | −₩600,000 |
| Net change in cash | −₩2,700,000 |
| Closing cash | ₩2,300,000 |
The new ₩1,200,000 equipment is awaiting installation and is not yet available for use. We assume no depreciation on it this month. The earlier ₩300,000 charge belongs to older equipment. Buying an asset uses cash; its whole purchase price does not immediately become an expense here.
Loan principal is the borrowed money itself, while interest is the price of using it. Repaying ₩600,000 of principal uses cash and reduces what the company owes, called a liability. It is not another ₩600,000 operating or interest expense.
You can reconcile the change from net income too: ₩800,000 + ₩300,000 − ₩2,000,000 − ₩1,200,000 − ₩600,000 = −₩2,700,000. Adding back depreciation removes a non-cash expense from that calculation. It does not mean depreciation put ₩300,000 into the bank. This is a simple bank-account reconciliation, not a formally classified cash flow statement.
A cash flow statement sorts actual receipts and payments into running the business, buying or selling longer-lived investments, and raising or repaying money. This article’s bank table simply matches the opening and closing balance. For the fuller statement, profit versus cash flow adds stock purchases and new borrowing in a separate example, then checks the result both by adding receipts and payments and by adjusting profit for cash differences.
Read the lines between sales and profit
Match the length of the reporting period before comparing companies. A quarter and a year-to-date total cover different amounts of time. Match the businesses included too: consolidated results combine a parent company with businesses it controls, rather than showing the parent alone. If others own part of a controlled business, some group profit belongs to those outside owners. Then examine which expenses grew, whether a gain can recur and how much recorded sales money has actually arrived. Seasonal businesses need more context than two neighboring months.
Growth percentages need care when the starting profit is zero or negative. A move from a loss to a profit is often clearer when you read the actual amounts and the explanation of the change. A cost cut can change earnings, repaying loan principal uses cash, and an asset sale may produce a one-off gain. The accompanying notes help you separate those effects.
A dividend is money a company decides to distribute to its owners. Net income does not automatically become that payment. The company can keep its earnings, while the cash available is being used to replace equipment or repay a loan. Money received by borrowing or selling new shares can fill the bank account without being café revenue. Read sales, profit and cash together to see what can fund the next payment.
Margins help explain what happened inside the business. They do not tell you whether its shares are reasonably priced. Our P/E, P/B and ROE guide connects earnings and equity to those ratios. If a company raises fresh money, the rights issue and bonus share guide follows that separate transaction. Cash received from issuing shares is financing, not café revenue.
About the examples
The café, expenses, tax assumption and tables were created for this guide. Both languages use the same Korean-won amounts without currency conversion. The 20% tax rate and expense classifications belong to this simplified model, rather than a current tax rule or prescribed reporting format. The next period, higher-interest case and disposal gain are separate alternatives.
The cash example reconciles the baseline bank account; it is not a formally classified cash flow statement. Calculations retain unrounded values and display final percentages to two decimals. This guide does not assess a real company or provide tax or investment advice. See our editorial policy.