What Is the Profit and Loss Statement (P&L)
A company’s profit and loss statement (P&L) is also known as the income statement. The P&L summarizes the revenues, costs, and expenses incurred during a period, typically a fiscal quarter or year. The P&L is found in the annual financial reports that all publicly traded companies are required by law to issue and distribute to shareholders. Annual financial reports include a company's P&L statement, balance sheet, and a statement of cash flow. Financial statements are found on a company's website.
Key Takeaways:
- A company’s profit and loss (P&L) statement shows the companies revenues, costs, expenses, and net profit for a certain period.
- The P&L statement can be found on a company's website and is one of the financial statements that public companies are required to issue by law to shareholders.
- The P&Ls for different periods should be looked at in conjunction with the cash flow statement for a more accurate picture of a company's financial health.
Understanding Financial Statements
Most companies, both public and privately held, make annual financial reports freely available and distribute them to shareholders, market analysts, portfolio managers, employees, and potential customers, investors, or creditors. The majority of companies use their annual financial reports as a marketing and advertising tool to enhance their corporate image.
In addition to the specific reports required to be included (P&L, balance sheet, cash flow statement), a company usually includes management discussion and analysis. This section is used by company management to present the best possible interpretation of the company's various financial statements and to give the best overall impression of the company's business prospects going forward.
P&L statements serve a variety of purposes for different groups. Management examines the statement attempting to identify ways to reduce costs or otherwise increase profits. Employees' interest in the P&L statement primarily pertains to salary negotiations and concerns about job security. Creditors and investors use the P&L statement to help them evaluate whether to invest capital in the company.
What Is Included in the Profit and Loss Statement (P&L)?
The P&L is typically front and center of any business plan because it shows how much profit or loss was generated by a business. Like the cash flow statement, the P&L shows the changes in the financial accounts over a period. The balance sheet is different because it shows the company's assets and liabilities at a snapshot in time.
The P&L should be looked at in conjunction with the cash flow statement, however, because if the accrual method of accounting is used, revenues and expenses can be logged on the P&L before the cash payments are made.
The general form of the statement is a line item for revenue, known as the top line. Below this, items that compose the cost of doing business are listed and subtracted from the revenue. These items include the cost of goods sold, such as materials and labor; operating expenses; tax expenses; and interest expenses.
To gauge the financial health of a company, analysts will study the P&Ls over more than one period along with other financial indicators.
The difference between the revenue and the costs of doing business is known as the bottom line, ornet income, and represents the company's profit or earnings. For business owners, free templates for creating a personal or business P&L statement can be found online.
Special Considerations for Profit and Loss Statements (P&Ls)
When assessing the financial health of a company, it is important to compare income statements for a company over 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.
