Question

Paragraph on profit and loss

Answer 1

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.

P&L management refers to how a company handles its P&L statement through revenue and cost management.

KEY TAKEAWAYS

The P&L statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.

It is important to compare P&L statements from different accounting periods, as the changes in revenues, operating costs, R&D spending, and net earnings over time are more meaningful than the numbers themselves.

Together with the balance sheet and cash flow statement, the P&L statement provides an in-depth look at a company's financial performance.

Understanding a Profit and Loss Statement (P&L)

What is a P&L Statement?

Investopedia/Grace Kim

The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.

The income statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the income statement with the cash flow statement since, under the accrual method of accounting, a company can log revenues and expenses before cash changes hands.

The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as profit or earnings. You can find many templates for creating a personal or business P&L statement online for free.

It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research and development spending, and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may grow, but its expenses might grow at a faster rate.

Profit and Loss Statement (P&L) Example

Below is Caterpillar Inc's income or P&L statement for 2013 and 2014 (all figures in USD millions except per-share data):

One can use the income statement to calculate several metrics, including the gross profit margin, the operating profit margin, the net profit margin and the operating ratio. Together with the balance sheet and cash flow statement, the income statement provides an in-depth look at a company's financial performance.

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Related Terms

Financial Accounting

Financial accounting is the process of recording, summarizing and reporting the myriad of a company's transactions to provide an accurate picture of its financial position. more

Reading Financial Performance

Financial performance is a subjective measure of how well a firm can use assets from primary operations and generate revenues. more

Certified Financial Statement

A certified financial statement is a financial reporting document that has been audited and signed off on by an accountant. more

Cash Flow From Operating Activities (CFO) Definition

Cash Flow From Operating Activities (CFO) indicates the amount of cash a company generates from its ongoing, regular business activities. more

Cash Flow From Investing Activities

Cash flow from investing activities reports the total change in a company's cash position from investment gains/losses and fixed asset investments. more

Accounting Definition

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS.

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Answer 2

Section 210 of the Companies Act, 1956 requires the Board of Directors of every company to lay at every annual general meeting held under section 166 – (i) a balance sheet as at the end of the accounting period, and (ii) a profit and loss account for that period. The accounting period is legally termed as “financial year”. The financial year may be less or more than the calendar year, but its maximum duration is fifteen months. On obtaining a special permission from the Registrar of Com­panies, it is possible to extend the duration of a financial year up to eighteen months.

In the Part II of the Schedule VI certain disclosure requirements have been specified. No form of profit and loss account has been prescribed in the Companies Act. Accordingly, a company can design its profit and loss account suitably provided it satisfies the disclosure requirements specified in Part II of the Schedule VI.

Central Government may exempt any class of company from compli­ance with any requirements of Schedule VI in the public interest. Also the Central Government may modify the requirements of Schedule VI on an application made by the Board of Directors or with the consent of the Board of Directors.

Vertically presented profit and loss account:

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Profit and loss account is prepared to find out the performance of the company in financial terms. It is required to be made out clearly to disclose the working result of the company covered by the account. It is to disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring and exceptional transactions. In other words, it is necessary to disclose separately non-recurring and exceptional items.

The Companies Act does not require preparation of any manufacturing account or trading account. Accordingly, it is suffi­cient to include all expenses under the heading “Operating Expenses”. Also the Companies Act does not specify any format for the preparation of profit and loss account. However, clause 3 of Part II of the Schedule VI requires that various items of income and expenditure are to be arranged under the most convenient heads. Now-a-days almost all the listed companies prepare profit and loss account in vertical format.

Essay # 2. Various Types of Profit:

Profit and loss account reflects financial performance of a company.

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i. Profit before Interest and Tax (PBIT):

This is measure of gross perfor­mance of the company with reference to its total capital employed. As the term suggests, interest and tax are not deducted while computing PBIT. Interest is reward of borrowed capital and tax is a compulsory deduction imposed by law. Generally, PBIT is used to measure managerial perfor­mance.

ii. Profit before Tax (PBT):

This is a measure of net profit before charging tax. Since tax is a compulsory and non-discretionary charge on the company, net profit is first presented before charging tax. By this the users can understand profit earning ability of the company and the tax impact separately.

iii. Profit after Tax (PA T):

This is a measure of net profit. This is used to understand the profit earned after tax charge.

iv. Distributable Profit:

This is given by PAT plus balance of Profit and Loss Account standing from previous years. Generally, the whole amount of profit is not used during the year. A small amount is left which can be used in the subsequent year for maintaining uniform rate of dividend.

v. Profit Available to the Equity Shareholders:

This is distributable profit minus dividend paid to preference shareholders.

vi. Operating Profit:

Profit and Loss Account includes elements of non- operating items. For example, income from investments is non-operating income which arises out of investment outside the business. Related expense is non-operating expense. Similarly, profit or loss on sale of fixed assets or investments is also categorized non-operating income/expense.

vii. Appropriations:

After computation of the profit available for distribu­tion or disposable profit, appropriations are shown at the bottom of the vertical profit and loss account. Appropriations include – (i) transfer to general reserve (ii) transfer to debenture redemp­tion reserve and (iii) proposed dividends.

Para 3 (viii) of Part II of Schedule VI requires disclosure of proposed transfer to reserves and withdrawals from the reserve, if any. The Companies (Transfer of Profits to Reserves) Rules, 1975 specifies per­centage of profit to be transferred to reserve in case dividend is pro­posed. Percentage of profit to be transferred to reserve is applied to “current profit”. The current profit is arrived at after providing for depreciation and arrears depreciation. Current profit implies profit after tax.