Profit and Loss Statement

Profit and Loss Statement

Together with the cash flow statement and the balance sheet, every publicly traded company also releases its profit and loss statement, or P&L statement, quarterly and annually. Given that it reveals how much revenue or loss a company makes, it is frequently the most common and well-known financial statement in a business strategy. 

What is a P&L statement? 

A P&L statement, also known as an income statement, is a financial document that presents a business’s revenues, expenses, and net income over a specific period. It is a crucial tool for understanding a company’s financial health and evaluating its profitability. A  P&L statement is typically prepared monthly, quarterly, or annually and provides a summary of the company’s financial performance during that period. 

The P&L statement is a critical tool for businesses to monitor their financial performance and make informed decisions about the future. By analysing the statement, business owners can identify areas of the business that are performing well and those that need improvement. They can also use the statement to compare their financial performance to industry benchmarks or competitors’ performance. In short, a well-prepared P&L statement is essential to any business’s financial management strategy. 

Understanding a P&L statement 

Understanding the components of a P&L statement is critical for business owners, investors, and creditors. It provides insights into the company’s performance and financial health, which can inform investment decisions and help identify areas where the company can improve its profitability. 

The P&L statement starts with the company’s total revenues, including all the income generated from selling goods or services. The next section of the statement outlines the company’s expenses, which include all the costs incurred to produce and sell its products or services. These expenses can include salaries and wages, rent, utilities, advertising, and other expenses related to running the business. 

The difference between the total revenue and expenses is the net income, which is the company’s profit or loss for the period. A positive net income indicates that the company has made a profit, while a negative net income indicates that the company has incurred a loss. 

How does a P&L statement work?

A P&L statement begins by showing the total revenue earned during the period in question. This revenue figure is then reduced by the cost of goods sold (COGS), which includes the cost of materials, labour, and overhead expenses associated with producing the goods or services sold. The resulting figure is known as the gross profit. 

After calculating the gross profit, the statement lists the company’s operating expenses, including selling, general, and administrative expenses (SG&A). This figure is subtracted from the gross profit to determine the operating income or loss.  

The final section of the statement includes any income or expenses that are not part of the company’s core operations, such as interest income and expenses, taxes, and any gains or losses from investments or asset sales. 

Structure of the P&L statement 

The income made and expenses incurred during the statement are the two main elements of a P&L statemen. The many entries about your business break down these two elements. 

Additionally, the following metrics are included in the structure: 

  • Earnings before income tax (EBIT) 
  • Net profit 
  • Net sales 
  • Cost of goods sold (COGS) 
  • Operating expenses 
  • Net income from operations 
  • Gross profit 
  • Other income 
  • Other expenses 
  • Income tax 

Example of a P&L statement 

The income or P&L statement for the fictional company XYZ Industries for 2022 and 2023 may be seen below. Except for the per-share statistics, all numbers are in millions of US dollars (USD): 

 

XYZ Industries  2022  2023 
Sales and revenues     
Sales of Machinery, Energy & Transportation  50,242  52,485 
Revenues of Financial Products    3,567  2,399 
Total sales and revenues  54,879  56,767 
Operating costs   –  –  
Cost of goods sold  38,768  39,929 
Selling, general, and administrative expenses  5,697  5,547 
Research and development expenses  2,985  1.946 
Interest expense of Financial Products  594  657 
Other operating (income) expenses  1,433  1,081 
Total operating costs  48,896  4,928 
Operating profit  5,108  5,720 
Interest expense excluding Financial Products  495  486 
Other income (expense)  149  (45) 
Consolidated profit before taxes  6,066  5,398 
Provision (benefit) for income taxes  1,289  1,219 
Profit of consolidated companies  3,623  3,409 
Equity in profit (loss) of unconsolidated affiliated companies  9  (5) 
Profit of consolidated and affiliated companies  3,761  3,993 
Less: Profit (loss) attributable to noncontrolling interests  14  10 
Profit [footnote 1: Profit attributable to common shareholders]  3,987  3,674 
Profit per common share  5.97  5.85 
Profit per common share — diluted [footnote 2: Diluted by assumed exercise of stock-based compensation awards using the treasury stock method]  4.99  5.16 
Weighted-average common shares outstanding (millions)       
– Basic  709.2  695.2 
– Diluted [see footnote 2]  648.6  700.6 
Cash dividends declared per common share  2.27  2.39 
Less: Profit (loss) attributable to noncontrolling interests  18  16 
Profit [footnote 1: Profit attributable to common shareholders]  4,487  5,109 

Frequently Asked Questions

The impact of accounting principles on the P&L statement is significant. It ensures that the financial information presented in the P&L statement is consistent, comparable, and relevant to the interested parties.  

The principles ensure that the revenue and expenses are recorded accurately and that the net profit or loss is calculated correctly. The P&L statement prepared per the accounting principles provides valuable insights into a company’s financial performance, which helps investors, analysts, and other stakeholders make informed decisions. 

Therefore, adhering to accounting principles while preparing the P&L statement is essential. Compliance with these principles can result in accurate financial reporting, positively impacting a company’s reputation and credibility.  

Here are some of the simplest items to consider in your P&L statement: 

  • Net sales 
  • Sources of Income or Sales 
  • Selling, general and administrative expenses  
  • Net Income 
  • profit margin 
  • Seasonality 
  • Cost of Goods Sold 

The importance of preparing a P&L statement includes the following: 

  • If you can access your company’s profit and loss statement, you may quickly assess how the firm performed over a specific period. 
  • You may show potential investors or purchasers how your company performs throughout operations by keeping up-to-date profit and loss accounts. This gives you some strong negotiation leverage. 
  • When it’s time to file your business taxes, you’ll have all the information you need if you keep your P&L statements and other financial records up to date.   

The components of the P&L statement are as follows: 

  • Cost of sales 
  • General, sales, and administrative expenses 
  • Revenue 
  • Gains and losses 
  • Other operating expenses 
  • Non-operating income and expenses 
  • Earnings per share
  • Non-recurring items 
  • Net income 

There is no differentiation between the statement of revenue and the profit and loss statement. A P&L statement is another term for a statement of revenue. The income statement is also called the statement of income or the statement of operations. 

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