Profit and Loss Statement Exercise

The Profit and Loss statement is one of the main business financial statements. Among the various financial statements, a Profit and Loss statement most closely resembles what is referred to as “the bottom line”. Since the purpose of a business is to earn a profit, both the business owner and outside entities such as bankers and investors have a keen interest in revenues.

A Profit and Loss Statement provides a snapshot of a firms’ financial viability for a certain period of time, usually one year. Therefore, the “bottom line” reveals the company’s net earnings or losses. Net is a key term, because after the warm glow of sales income is felt, then comes the reality check of expenses and other costs which eat into profits.

Among the common components found in an income statement are net sales, the costs of goods sold, the costs of inventory if applicable, and regular expenses such as office rent, payroll, supplies, etc? When both negative and positive finances elements are revealed on an income statement, key components contributing to profit or loss for the period can be identified.

The structure of a Profit and Loss Statement begins by showing income received. Any financial impacts which reduce income, such as customer returns, must be are reflected.After all gross sales and negative financial impacts on those sales are taken into account; the company arrives at a Net Sales figure.

Of course, it costs a company to set up and prepare to provide products or services. These costs are reflected in the next section of the Profit and Loss Statement called the Cost of Goods Sold. Among typical costs outlined in this section are purchases for inventory or other costs associated with preparing a product to sell. The cost of Inventory (minus depreciation) value purchased but not yet utilized is subtracted before a sum total of Cost of Goods Sold is derived.

Once all costs are associated with product preparation are accounted for, the Profit and Loss Statement subtracts this figure to arrive at the Company’s Gross Profit. All cash flow coming into a company is not limited to that earned in actual sales transactions. The company may also experience increased income from the interest paid on its accounts.After all sources of income are included, the Profit and Loss Statement shows the company’s Total Income.

The last stage in the development of a company’s Profit and Loss Statement is to outline a list of expenses associated with the ongoing operations of a company. Typical items displayed include utilities, rent and salaries. Just as income interest earned is reflected among income items, a company should also show display interest paid among its expenses. The sum of all expenses is obviously – Total Expenses.

The final step in the Profit and Loss Statement is the resulting of calculating the result of subtracting Total Expenses from Total Income, the result of which is called Net Income.