A company's annual statement consists of a balance sheet, profit and loss account and cash flow statement. In the earlier article we have covered the balance sheet. In this page we will talk about the subject of "Profit and Loss" statement.
Profit and Loss is a statement of revenue performance over a specific period of time showing:
• Sales- The value of products or services sold to its customers.
• Costs it has incurred to achieve its above sales. These are attributable costs and are governed by rules. You cannot go on a pleasure trip and charge it to company. Any business development expense would be attributable cost. You should consult your Chartered Accountant on what is allowed and not allowed.
It does not measure the cash flows in and out of business. This is given separately by some companies. In some countries it is part of the balance sheet as per law and accounting standards. This is a vital part of Financial management. Study of this vital clue gives an indication on how the company has managed its cash. I spend a great deal of time on this statement while analyzing balance sheets. It can be very revealing, provided you know what you are looking for.
• Stocks - This will be both raw materials and finished goods which are both in your custody.
• Creditors, also known as 'Bills Payables' - This will be the amount you have to pay for goods received in your stock but not paid.
YOU SHOULD REMEMBER THAT PROFIT IS NOT EQUAL TO CASH.
• Operating profit is gross income less attributable costs. This is also referred to as Gross profit.
• Financing Costs- This is your interest costs and Taxes.
• Earnings - This is the amount you have earned after apportioning all costs. This is also divided by number of shares and given as earnings per share (EPS)
• Dividend- This amount is also specified in advance subject to approval in AGM and indicated.
• Retained profits- This is the surplus amount carried forward to balance sheet for next year.
When you compare two companies performance in the same business, just because one company has made more profits does not make it better. You should compare the profits on the basis of ROCE. This is Operating profit divided by net capital employed and expressed in %.The company having a higher % has done better as it has used its capital better. We often get carried away by profits and size of the company. You should remember size is always not an advantage and you may be carrying a lot of fat.
© Copyright, August 8, 2008. Without prejudice. All rights reserved
Profit and Loss Account Statement - To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name
/mtg.html;
mmgconsu
lting.biz/
Madhavan's articles can be accessed at www.madgopes.com
.
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