Profit and Loss Account

Profit and Loss Account

Measures gains and losses from all operations over a period of time, usually a year or a quarter of year. Made of:

• Revenue = monetary value of a company's sales of goods and services. It can increase if prices increase, if the volumes of sales increase, or improving the product mix (selling more high-priced items than low-priced ones). TOP LINE
• Operating costs = cost of inputs (labour, machinery, bills, etc. for a manufacturer), logistics & transportation or products themselves (for a retailer), producing services (for other services firms). Typical items are "(purchase of) materials", "administration (costs)", "labour (costs)", "sales and marketing expenses".
• EBITDA = Earnings before you start paying different stakeholders. Close approximations of cash flow obtained from the normal trading activities (revenues - costs of related inputs). Free from artificial distortion that could arise from

accounting policies. → (Annual) depreciation = (Cost - Residual value)/Estimated useful life

straight line method, since every year it goes down by the same amount. Nonetheless, depreciation is not usually constant → accelerated-diminishing balance method, which accounts for the same proportional reduction in price. The resulting line will be a curve, which will never reach zero.

Amortization = depreciation for intangible assets, e.g. patents and trademarks, copyrights, licenses. Together with depreciation reduce the net valuation of the corresponding assets.

EBIT = Earnings Before Interest and Taxes, BITDA - Depreciation - Amortization.

Ex: Cost=11k, Useful economic life=5 years, Residual value=1k → depreciation = 2000/year

EBITDA = 15k-5k=10k

EBIT = 10-2=8k

Interests = payment to banks

EBT = Earnings before payment of taxes; many companies use different techniques to avoid/minimize taxes.

Income taxes

Net profit = EBT - taxes

Dividends, eventually = depends

• On the industry, on the firm, etc.
• Earnings paid back to shareholders; there are firms that do not pay dividends (as Amazon) or firms that pay a lot of dividends (as Microsoft). Retained earnings = what's left after paying everyone else. Net income, BOTTOM LINE.
• Stakeholders:
  • Customers, send revenues
  • Suppliers, ask cost off materials
  • Employees, to assemble raw materials
  • Banks, interest rate