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Profit and Loss Statement (P&L)

A summary of income and expenditures for a business

What is the Profit and Loss Statement (P&L)?

A profit and loss statement (P&L), or income statement, is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time.  The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits. It is prepared based on accounting principles that include revenue recognition, matching, and accruals, which makes it different from the cash flow statement.

 

Structure of the Profit and Loss Statement

A company’s statement of profit and loss is portrayed over a period of time, typically a month, quarter, or fiscal year.

The main categories that can be found on the P&L include:

 

Example Profit and Loss Statement (P&L)

Below is an example of Amazon’s 2016 P&L statement, which it labels as it’s Consolidated Statement of Operations.

 

Example Profit and Loss Statement (P&L) from Amazon

Source: Amazon’s 2016 annual report.

Looking at the above example, we see that Amazon posted a loss of $241 million in 2014, a profit of $596 million in 2015, and a profit of $2.3 billion in 2016.

Amazon breaks down its total revenue into product sales and service sales.  Its operating expenses consist of cost of sales, fulfillment, marketing, technology, G&A, and other.  At this point, it provides a subtotal on the statement for Operating Income, also commonly referred to as Earnings Before Interest and Taxes (EBIT).

Below that, interest expense and taxes are deducted to finally arrive at the net profit or loss for the period.

 

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Income Accounts vs Expenditure Accounts

There are two main categories of accounts for accountants to use when preparing a profit and loss statement.

The table below summarizes these two accounts: income and expenditures.

 

IncomeExpenditure
RevenueCost of Goods Sold
SalesMarketing and Advertising
Interest IncomeSelling, General & Administrative
GainsSalaries, Benefits & Wages
Fees ChargedInterest Expense
Commissions EarnedInsurance
Rental IncomeTelecommunication
Professional Fees
Taxes

 

Impact of accounting principles on the P&L Statement

It might not seem obvious by looking at a profit and loss statement, but the final figure at the bottom (i.e., the total profit or the total loss) may be very different from the actual amount of cash that’s made or lost.

The main factors that create a difference between profit and cash generation are:

  • Revenue recognition principle – revenue is often recognized before cash is received (which creates accounts payable on the balance sheet)
  • Matching principle – expenses are matched to revenues during the period(s) those revenues are earned
  • Accrual principle – income and expenditures should be recorded during the periods they occur, not when cash is received, which can make revenue and expenses materially different from cash flow

 

Beyond the Profit and Loss Statement

Analysts must go beyond the profit and loss statement to get a full picture of a company’s financial health. To properly assess a business, it’s critical to also look at the balance sheet and the cash flow statement.

#1 Analyzing the Balance Sheet

The Balance Sheet show’s a company’s assets, liabilities, and equity at a specific point in time.  This snapshot of the company’s financial position is important for assessing:

  • The company’s asset base – ability to generate future revenues
  • Liabilities – future obligations the company has to meet
  • Working capital – the company’s short-term liquidity position
  • Captial structure – how a company is financed between debt and equity
#2 Analyzing the Cash Flow Statement

The Statement of Cash Flow shows how much cash a company generated and consumed over a period of time.  It consists of three parts: cash from operations, cash used in investing, and cash from financing. This statement is important for assessing:

  • The company’s ability to generate cash from operations
  • Free Cash Flow generation
  • How much money is being raised (debt and or equity)
  • The net change in cash position over the period

 

How to Analyze a Profit and Loss Statment (P&L)

One of the main jobs of a financial analyst is to analyze the P&L of a company in order to make recommendations about the financial strength of the company or attractiveness of investing in it or even acquiring the entire business.

Examples of P&L statement analysis include:

  • Comparing year-over-year numbers (horizontal analysis)
  • Looking at margins: gross profit margin, EBITDA margin, operating margin, net profit margin
  • Trend analysis
  • Rates of return: return on equity (ROE), return on assets (ROA)
  • Valuation metrics: EV/EBITDA, P/E ratio, etc

 

Profit and Loss Statement Video Explanation

Below is a video explanation of how the profit and loss statement (income statement) works, the main components of the statement, and why it matters so much to investors and company management teams.

 

 

Additional resources

Thank you for reading CFI’s guide to understanding the profit and loss statement. Our mission is to help you advance your career, and with that goal in mind, these additional resources will be very helpful:

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