What is Profit and Loss Statement?
The Profit and Loss Statement (P&L) is a financial statement that starts with revenue and deducts costs and expenses to arrive at net income, the profitability of a company, in a specified period.
How to Read the Profit and Loss Statement? (P&L)
The profit and loss statement, or “P&L statement”, is interchangeable with the income statement, one of the three core financial statements that all publicly traded companies are obligated to file with the SEC.
In particular, the P&L statement shows the operating performance of the company as well as the costs and expenses that impact its profit margins.
Upon assessing a company’s P&L statement, one can gauge the company’s ability to:
- Generate Revenue (“Top Line”)
- Manage Costs and Expenses, e.g. COGS, Operating Costs, SG&A
- Create Profits, e.g. Gross Margin, Operating Margin, EBITDA Margin, Net Profit Margin
How to Prepare the Profit and Loss Statement? (P&L)
The standard profit and loss statement (P&L) will consist of the following line items:
|P&L Statement||Line Items|
|Less: Cost of Goods Sold (COGS)||
|Less: Operating Expenses (SG&A)||
|Operating Income (EBIT)||
|Less: Interest Expense||
|Pre-Tax Income (EBT)||
|Net Income (“Bottom Line”)||
What is an Example of the P&L Statement?
For a real-world example, the income statement of Apple (NASDAQ: AAPL), the leading consumer electronics and software company, is shown below.
Apple Income Statement Example (Source: 2022 10-K)
What are the Different P&L Statement Reporting Methods?
The profit and loss statement (P&L) can be prepared by an accountant under two methods: 1) accrual accounting and 2) cash basis accounting.
P/L Format 1. Accrual Accounting
- Under the revenue recognition principle, revenue is recognized when “earned” under GAAP standards (i.e. product or service delivered to the customer regardless of whether cash payment was received)
- Expenses are matched in the same period as the corresponding revenue they helped create, which is called the matching principle.
- P&L statements filed under accrual accounting are required under U.S. GAAP standards.
P/L Format 2. Cash Basis Accounting
- Under cash accounting, revenue is not recognized until the customer pays in cash to the company for the products/services received
- Expenses under cash accounting, similar to revenue, are not recognized until the cash outflow occurs – meaning that the company has actually paid the third party in cash.
- P/L statements prepared under cash-basis accounting are more common for private companies.
How is the P&L Statement Different for Private Companies?
Note that for many private companies, revenue is recorded as “income” and the expenses are often combined in a single section, rather than distinguishing between:
The lack of standardization for private companies makes adjusting the financials often a necessary step to properly evaluate the actual financial performance of the company.
For instance, in the context of an acquisition where the acquirer follows accrual accounting, adjustments to a target company’s financial statements would be necessary if it follows cash accounting.
Profit and Loss Statement Calculator (P&L)
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Profit and Loss Statement Template (P&L)
Suppose we’re creating a simple profit and loss statement (P&L) for a company with the following financial data.
- Revenue = $100 million
- COGS = $40 million
- SG&A = $20 million
- Interest Expense = $5 million
- Tax Rate = 30%
Given those assumptions, we can enter them into our P&L format, with the following line items being formulas, as opposed to hard-coded inputs.
- Gross Profit = $100 million – $40 million = $60 million
- EBIT = $60 million – $20 million = $40 million
- Pre-Tax Income (EBT) = $40 million – $5 million = $35 million
- Net Income = $35 million – ($35 million × 30%) = $25 million