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What is a Profit and Loss Statement?

Profit and Loss Statement

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Profit and Loss Statement

A profit and loss statement, also known as an income statement, is a financial document that summarizes the revenues, costs, and expenses incurred during a specific period of time, usually a fiscal quarter or year. The purpose of the profit and loss statement is to show managers and investors whether the company made or lost money during the period being reported.

The profit and loss statement is one of the three main financial statements used by businesses, along with the balance sheet and cash flow statement.

A typical profit and loss statement includes the following components:

  • Revenue: This is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
  • Cost of Goods Sold (COGS) : These are the direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good.
  • Gross Profit: This is calculated as Revenue – COGS.
  • Operating Expenses : These include salaries, rent, utilities, marketing expenses, and other costs related to the day-to-day operations of the business.
  • Operating Income: This is calculated as Gross Profit – Operating Expenses. It reflects the profit a company made from its operations alone without taking into account interest or taxes.
  • Pre-Tax Income: This is calculated as Operating Income plus or minus any other revenues and expenses not included in the calculation of operating income.
  • Tax: The amount of income tax owed based on the pre-tax income.
  • Net Income: This is calculated as Pre-Tax Income – Tax. It’s the bottom line of the profit and loss statement. It tells you how much profit (or loss) the company has made after all expenses have been accounted for.

Each of these components provides valuable information about a company’s profitability and financial performance over a specified period. Together, they provide a clear picture of a company’s financial health and the effectiveness of its business operations.

Example of a Profit and Loss Statement

Let’s look at an example of a simplified profit and loss statement for a fictional company, Widget Co., for the year 2023:

Widget Co. Profit and Loss Statement For the Year Ended December 31, 2023

Revenue: $1,200,000

Cost of Goods Sold (COGS): $600,000

  • Gross Profit: $600,000 (Revenue – COGS)

Operating Expenses:

  • Salaries: $200,000
  • Rent: $50,000
  • Utilities: $10,000
  • Marketing: $40,000
  • Depreciation: $30,000
  • Total Operating Expenses: $330,000

Operating Income (EBIT): $270,000 (Gross Profit – Total Operating Expenses)

Interest Expense: $20,000

Pre-tax Income (EBT): $250,000 (Operating Income – Interest Expense)

Income Tax (20%): $50,000

Net Income: $200,000 (Pre-Tax Income – Income Tax)

In this example, Widget Co. made $1,200,000 in revenue. After accounting for the cost of goods sold ($600,000), the gross profit was $600,000. After deducting operating expenses of $330,000, the operating income came out to be $270,000. After accounting for interest expenses and taxes, the net income (or profit) for the year was $200,000. This is the amount that Widget Co. actually earned after all expenses were paid. This profit can be reinvested back into the business, distributed to shareholders, or saved for future use.

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