What is it?
The profit and loss statement is one of the three fundamental financial statements that is used to evaluate a company’s financial position and performance in the field of professional accounting. The two others are cash flow statement and balance sheet.
How it works?
P&L statement compiles the revenues and expenses produced by the firm over the whole reporting time. The profit and loss statement is similarly known as the income statement, statement of income, statement of operations, or statement of earnings.
In the field of professional accounting, the primary equation on which a P&L statement is based is Revenues – Expenses = Profit.
All businesses need to produce revenue to grow and survive. Revenues are used to pay interest payments on debt, taxes owed to the government, and expenses. After the costs of carrying out business are paid, the value left over is known as net income.
Net income is accessible to stockholders, though rather than paying dividends, the company’s management usually prefers to retain earnings for investment in the future in professional accounting.
Profit and loss statements are prepared the same way, despite the industry. The essential outline is presented in the following example:
Profit and Loss Statement for Company ABC, Inc.
For the year ended December 31, 2017
Total Revenue: $100,000
Cost of Goods Sold: ($ 20,000)
Gross Profit: $ 80,000
Utilities: $ 5,000
Total Operating Expenses: ($ 30,000)
Operating Profit (EBIT): $ 50,000
Interest Expense: ($ 10,000)
Income before taxes (EBT): $ 40,000
Taxes: ($ 10,000)
Net Income: $ 30,000
Number of Shares Outstanding: $30,000
Earnings Per Share (EPS): $1.00
Why does it matter?
Anyone engaged in professional accounting, active picking stocks, investing, or investigating the financial position of a business must know how to understand financial statements, which includes the profit and loss statement. The significance of the information contained in the profit and loss statement will not be exaggerated.
The ability or inability of the firm to produce earnings over the long term is the principal driver of bond and stock prices. EBIT or Operating profit is the cause of debt payment.
When a business cannot generate sufficient EBIT to pay its debt commitments, it has to suffer bankruptcy.
Net income is the root of return to owners of the company, and if a business cannot produce enough value to compensate owners for the risks they have taken, the value of the owners’ shares will fall.
Conversely, if a business is growing and healthy, higher bond and stock prices will show the lengthened availability of profits.
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