What is the ‘Profit and Loss Statement (P&L)’
A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company’s ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both. The P&L statement is also referred to as “statement of profit and loss”, “income statement,” “statement of operations,” “statement of financial results,” and “income and expense statement”.
BREAKING DOWN ‘Profit and Loss Statement (P&L)’
The profit and loss statement, commonly referred to as the income statement, is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. The income statement, like the cash flow statement, shows changes in accounts over a set period of time. The balance sheet, on the other hand, is a snapshot, showing what is owned and owed at a single moment. It is important to compare the income statement with the cash flow statement, since under the accrual method of accounting, revenues and expenses can be logged before cash actually 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 cost of goods sold, operating expenses, tax expense and interest expense. The difference, known as the bottom line, is net income, also referred to as profit or earnings. Many templates for creating a personal or business profit and loss statement can be found 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 be growing, but its expenses might be growing at a faster rate.
When companies release quarterly reports, the headline numbers are revenues and earnings per share (EPS); the latter is often adjusted for one-time events such as, in Caterpillar’s case, restructuring costs (adjusted diluted EPS for 2014 was $6.38). The market’s immediate reaction has more to do with how these numbers compare to analysts’ expectations than whether they represent sustainable growth. Even so, investors—particularly those with longer time horizons—are wise to dig deeper into a company’s income statement.
We can see that revenues from Caterpillar’s core business fell from 2013 to 2014, leading to a 0.85% decrease in total revenues, although its financial products division grew slightly. The cost of revenue (“cost of goods sold” plus “interest expense of Financial Products”) decreased at a faster rate, by 2.56%, easing the blow to the bottom line. Interest expenses rose slightly, suggesting we take a look at the company’s debt on its balance sheet. We can see that operating profit, profit before tax and net earnings all fell, although net earnings fell faster (-2.48%) than profit before tax (-0.88%); this is largely because income taxes rose by $61 m, despite the decrease in total revenue. Although Caterpillar’s net earnings shrank from 2013 to 2014, diluted earnings per share rose. The reason is that outstanding shares decreased by 28 m, reflecting an aggressive stock buyback program Caterpillar pursued in 2014.
The income statement can be used to calculate a number of 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 and position.