Profit and Loss Statement (P&L)

Guide to Understanding the Profit and Loss Statement (P&L)

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.

For public companies listed in the U.S., the 10-Q profit and loss statement (P&L) must be filed each quarter, with a 10-K annual filing due for the 4^th quarter.

10-Q → 3x Per Year (and 4th is 10-K)
10-K → 1x Per Year

Together, alongside the cash flow statement and balance sheet, the P&L statement provides a detailed depiction of the financial state of a company.

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
Revenue	Sales Generated from Selling Products/Services to Customers
Less: Cost of Goods Sold (COGS)	Costs Directly Associated with Core Revenue Production
Gross Profit	Gross Profit = Revenue – COGS
Less: Operating Expenses (SG&A)	Indirect Costs NOT Directly Related to Revenue Creation
Operating Income (EBIT)	EBIT = Gross Profit – Operating Expenses
Less: Interest Expense	Periodic Payments on Debt Obligation (i.e. the Cost of Debt Financing)
Pre-Tax Income (EBT)	EBT = EBIT – Interest Expense
Less: Taxes	Legally Mandatory Payments to the City, State, and Federal Government
Net Income (“Bottom Line”)	Net Income = EBT – Taxes

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.