What’s a profit and loss statement?
Two of the three financial statements that companies regularly release are the balance and profit and loss (P&L). Investors, creditors, and market analysts use these statements to evaluate a company’s financial health and growth potential. The third financial statement is the cash flow statement.
Structure of the Profit and Loss Report
A company’s profit-and-loss statement is typically presented over a while, such as a quarter or a fiscal year.
The P&L lists these main categories:
- Revenue (or Sales)
- Cost per unit of goods (or cost of sale)
- Selling, General & Administrative (SG&A), Expenses
- Advertising and marketing
- Technology/Research & Development
- Interest expense
- Net Income
Example Profit & Loss Statement (P&L)
Below is an example of Amazon’s 2015-2017 P&L statements. CFI’s Advanced Finance Modeling Course at Amazon will show you how to analyze financial statements.
Why is it important to have a Profit and Loss statement?
Companies may compare multiple P & L statements.
Understanding how revenue and expenses compare over time and across locations is important. Despite steady sales growth, your transportation costs have increased faster than you expected, making your overall performance appear flat. Profit and loss statements can identify the source of your expenses, reduce them or maximize your income.
The future is in your hands. Prospective business owners should include a projected profit and loss statement in their business plans. Even though a company might not have actual profits and losses, it will be able to show potential investors or loan agents how they intend to make a profit in the future.
Taxes are paid. Established businesses prepare profit and loss statements. This information can be used to prepare their taxes. This is especially true for small businesses.
What’s in a Profit and Loss Statement?
The profit and loss statement summarizes a company’s revenues and expenses over time. There are many income sources and expenses that organizations must keep track of and record in their profit and loss statements.
These are the major categories.
Revenue refers to the sale of products and services and recurring income not directly related to business operations like rental income or interest from bank accounts.
Profits These events, such as the sale of equipment or property, should not be included in an organization’s profit.
All operating expenses include wages, commissions, taxes, and overhead. These expenses can consist of renting equipment, utilities, and transportation and utilities. Earned interest should be included in your income, just like in revenue.
Losses These, like gains or one-time expenses, are events that result in a loss in business, such as a settlement in a lawsuit.
Net Income: Also called the “bottom line”, it is the way a profit and loss statement calculates. To calculate net income, add all your revenue and gains to the sum and subtract your losses from your expenses.
The following categories may be of interest to you:
Income and interest: This is the amount you pay in interest for your loans. Interest income is money you earn from certificates of deposit, money market accounts or other interest-bearing sources.
Income and other taxes: The income tax includes all federal, state, and local taxes. However, it does not include property taxes. Additional taxes are deductible and can be counted as operating expenses.
Earnings per Share (EPS), if you have shareholders, calculates how much money your shareholders would receive if your company distributes its net income. This is calculated by multiplying the net income and the number of outstanding shares.
Statements and Profit and Loss
Every public company publishes the P&L quarterly or annually. It also contains the balance and cash flow statements. The most popular and widely used financial statement in a business plan is the P&L statement. It indicates how much profit or loss the company has made. 1
The acronym can also be used to refer to P&L statements.
- Profit and loss account
- Statement Of Operations
- Statement of income
- Earnings statement
- Statement for expenses
- Income statement
Analyzing Profit and Loss Statements
The main task of a professional financial analyst is to analyze a company’s P&L to make recommendations about its economic strength, attractiveness for investing in it or whether to buy the entire business.
These are some examples of P&L statement analysis
Industry benchmarking and horizontal analysis allow for year-over-year comparisons.
Trend analysis – Are metrics improving?
Return Return on Equity (ROE) and Return on Assets(ROA)
Value metrics include EV/EBITDA, P/E ratios, and price to book.
Success is measured
Any business should strive for profitability. This statement shows the extent to which it has reached this goal.
Companies are required to keep P&L statements in certain formats. The P&L statement will usually show the revenues and costs of generating those. In simple terms:
Revenues = Profits
A business should have a balance sheet in addition to its profit-and-loss statement. These reports can provide valuable information for managers and owners.
Balance sheets, profit, and loss reports, and other reports are a way to see how a company operates and where it can improve. These reports also show whether earnings have been consistent.
When is a P&L appropriate?
Usually, a profit and loss statement will be created at the end of accounting periods, such as the quarter’s close. This allows companies to track their financial position and adjust for the next quarter.
The Impact of Accounting Principles on the P&L Statement
Although it might not be obvious when looking at a profit-and-loss statement, the final figure at the bottom (i.e. the total profit or total loss) could differ from the actual cash made or lost.
These are the main factors that make a difference in profit and cash generation.
Revenue recognition principle: Revenue is often recognized before cash (which creates accounts receivables on the balance sheet).
Matching principle: Expenses are compared with revenues for the period in which those revenues were earned
Accrual principle Income and expenditures should only be recorded as they occur and not when cash is received. This can lead to revenue and expenses significantly different from cash flow.
Beyond the Profit & Loss Statement
Analysts need to look beyond the profit-and-loss statement to see a complete picture of a company’s financial health. It is crucial to examine the balance sheet and the cash flow statement to evaluate a company properly.
Analyzing Balance Sheet
The balance sheet is a snapshot of a company’s assets and liabilities at a particular time. It is crucial to assess the financial situation of a company.
Company’s assets – potential to generate future revenue
Liabilities: Future obligations that the company must meet
Working capital is the company’s short-term liquidity position
Capital structure: How a company is funded between equity and debt
These expenses are subtracted from sales revenues to produce a profit-and-loss statement that provides a better picture of the company’s gains and losses.
The P&L will usually include the sections “Income”, “Costs”, and multiple subheaders to categorize income and costs further.
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