What Is a Profit and Loss Statement (P&L)?
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.
For non-profit organizations, revenues and expenses are generally tracked in a financial report called the statement of activities (sometimes called statement of financial activities or statement of support).
P&L management refers to how a company handles its P&L statement through revenue and cost management.
- 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)
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):
|Twelve Months Ended December 31,||2014||2013|
|Sales and revenues:|
|Sales of Machinery, Energy & Transportation||52,142||52,694|
|Revenues of Financial Products
|Total sales and revenues||55,184||55,656|
|Cost of goods sold||39,767||40,727|
|Selling, general and administrative expenses||5,697||5,547|
|Research and development expenses||2,135||2,046|
|Interest expense of Financial Products||624||727|
|Other operating (income) expenses||1,633||981|
|Total operating costs||49,856||50,028|
|Interest expense excluding Financial Products||484||465|
|Other income (expense)||239||(35)|
|Consolidated profit before taxes||5,083||5,128|
|Provision (benefit) for income taxes||1,380||1,319|
|Profit of consolidated companies||3,703||3,809|
|Equity in profit (loss) of unconsolidated affiliated companies||8||(6)|
|Profit of consolidated and affiliated companies||3,711||3,803|
|Less: Profit (loss) attributable to noncontrolling interests||16||14|
|Profit [footnote 1: Profit attributable to common shareholders]||3,695||3,789|
|Profit per common share||5.99||5.87|
|Profit per common share – diluted [footnote 2: Diluted by assumed exercise of stock-based compensation awards using the treasury stock method]||5.88||5.75|
|Weighted-average common shares outstanding (millions)|
|- Diluted [see footnote 2]||628.9||658.6|
|Cash dividends declared per common share||2.70||2.32|
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.
Frequently Asked Questions
What is a profit and loss (P&L) statement?
A P&L statement is one of the three types of financial statements prepared by companies, the other two being the balance sheet and the cash flow statement. The purpose of the P&L statement is to show the revenues and expenditures of the company over a specified period of time, usually one fiscal year.
Using this information, investors and analysts can assess the profitability of the company, often combining this information with insights from the other two financial statements. For instance, an investor might calculate a company’s return on equity (ROE) by comparing its net income (as shown on the P&L) to its level of shareholder’s equity (as shown on the balance sheet).
What is the difference between a P&L statement and a balance sheet?
Whereas the P&L shows the income, expenditures, and profitability of a company over a period of time, the balance sheet provides a snapshot of the company’s assets and liabilities as of a certain date. Typically, the balance sheet is presented as of the last day of the company’s fiscal year. Investors use the balance sheet to understand the financial strength of the company, comparing the amount and quality of its assets against its liabilities.
Are all companies required to prepare P&L statements?
Publicly traded companies are required to prepare P&L statements and must file their financial statements with the Securities and Exchange Commission (SEC) so that they can be scrutinized by investors, analysts, and regulators. In preparing these statements, public companies must comply with a set of rules and guidelines known as generally accepted accounting principles (GAAP).
Private companies, on the other hand, are not necessarily required to comply with GAAP, and some smaller companies may even not prepare formal financial statements at all.
Securities and Exchange Commission. "Caterpillar (Form 10-K)." Accessed July 24, 2020.