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 a year. Made of:

Revenue

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

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.

Depreciation

(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

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

EBIT

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

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 of materials
• Employees, to assemble raw materials
• Banks, interest rate