How company’s Profit & Loss and Balance Sheet Statement works?
Profit & loss statement is where total revenue or total sales derive the company’s activities with deducting the cost of goods sold (COGS) and business expenses and leads towards net operating income. If the income is showing profit means the business is worth to run while if showing losses, means the owner needs to strategic the business and pluck the expenses loopholes. A simple formula to understand:
- Total revenue – Cost of Goods Sold (COGS) = Gross Profit
- Gross Profit- Total Expenses (operation, finance & admin) = Operating Income
- Operating Income – Taxes = Net Income
- Net Income – Retained Earnings = Profit to be distributed
- Profit to be distributed / total shares = Cash dividends declared per common share
Each entry gives specific insight into the cash flow of the company and paints a comprehensive picture of where money is coming from and how it is used. The P&L statement is unique in its ability to provide a comprehensive context for assessing financial fitness.
Sample Template of Income Statement: Income Statement
Balance Sheet shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It provides a basis for computing rates of return and evaluating its capital structure. This financial statement provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
i. Total assets = Liabilities + Owner’s Equity
Sample template of balance sheet: Balance Sheet
How Investors, prospect shareholders or bankers in viewing P&L Statements?
Investors and lenders use the financial statements in calculations to determine a company’s risk level. To apply for loans, companies must provide evidence of their strong financial standing and ability to commit consistent payments. If the P&L statement reflects that a company does not create enough income to adequately cover existing loan payments, banks are less likely to loan additional funds.