CORE CONCEPTS
PROFIT AND LOSS ACCOUNT
ACCOUNTING FOR ALL THE INPUTS AND OUTPUTS ASSOCIATED WITH ECONOMIC ACTIVITY
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TO DO ... Images to be changed to be more relevant for the subject
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NAVIGATION
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What is the 'Profit and Loss Statement (P&L)'
A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company's ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both. The P&L statement is also referred to as 'statement of profit and loss', 'income statement,' 'statement of operations,' 'statement of financial results,' and 'income and expense statement.'
https://www.investopedia.com/terms/p/plstatement.asp
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https://www.investopedia.com/terms/p/plstatement.asp
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BREAKING DOWN 'Profit and Loss Statement (P&L)'
The profit and loss statement, commonly referred to as the income statement, is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. The income statement, like the cash flow statement, shows changes in accounts over a set period of time. The balance sheet, on the other hand, is a snapshot, showing what is owned and owed at a single moment. It is important to compare the income statement with the cash flow statement, since under the accrual method of accounting, revenues and expenses can be logged before cash actually changes hands.
The income statement follows a general form as seen in the example below. It begins with an entry for revenue, known as the 'top line,' and subtracts the costs of doing business, including cost of goods sold, operating expenses, tax expense and interest expense. The difference, known as the bottom line, is net income, also referred to as profit or earnings. Many templates for creating a personal or business profit and loss statement can be found online for free.
It is important to compare income statements from different accounting periods, as the changes in revenues, operating costs, research and development spending and net earnings over time are more meaningful than the numbers themselves. For example, a company's revenues may be growing, but its expenses might be growing at a faster rate.
Find out which online broker offers financial statements for a specific stock by reading Investopedia's broker reviews.
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Below is Caterpillar Inc's (CAT) income or profit and loss statement for 2013 and 2014
(all figures in millions of USD except per share data):
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Twelve Months Ended December 31,
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2014
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2013
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COMMENT
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Sales and revenues:
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Sales of Machinery, Energy & Transportation
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52,142
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52,694
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Revenues of Financial Products
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3,042
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2,962
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Total sales and revenues
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55,184
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55,656
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Operating costs:
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Cost of goods sold
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39,767
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40,727
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Selling, general and administrative expenses
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5,697
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5,547
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Research and development expenses
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2,135
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2,046
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Interest expense of Financial Products
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624
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727
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Other operating (income) expenses
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1,633
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981
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Total operating costs
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49,856
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50,028
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Operating profit
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5,328
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5,628
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Interest expense excluding Financial Products
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484
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465
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Other income (expense)
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239
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(35)
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Consolidated profit before taxes
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5,083
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5,128
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Provision (benefit) for income taxes
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1,380
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1,319
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Profit of consolidated companies
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3,703
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3,809
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Equity in profit (loss) of unconsolidated affiliated companies 8 (6)
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Profit of consolidated and affiliated companies 3,711 3,803
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Less: Profit (loss) attributable to noncontrolling interests 16 14
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Profit [footnote 1: Profit attributable to common shareholders] 3,695 3,789
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Profit per common share 5.99 5.87
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Profit per common share – diluted [footnote 2: Diluted by assumed exercise of stock-based compensation awards using the treasury stock method] 5.88 5.75
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Weighted-average common shares outstanding (millions)
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- Basic 617.2 645.2
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- Diluted [see footnote 2] 628.9 658.6
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Cash dividends declared per common share 2.70 2.32
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Overview of the ORGANIZATION Perspective
The purpose of economic activity is for people to improve and maintain their quality of life and standard of living. The business ORGANIZATION can be a very efficient way of implementing economic activity. The assumption that what is good for business is good for people and society is however not supported by recent experience, though it was reasonably valid for most of the industrial revolution until around the 1970s.
There are very powerful metrics around the accounting and reporting of business organization performance. These are based on what may be referred to as conventional accounting whcih tracks all money based transactions related to the organization and organizes the information into accounts that facilitate reporting of the balance sheet ('state') of the organization and the profit and loss account ('flow' or profit) of the organization. This system of metrics is powerful because it allows for easy summarization of the data for reporting and in addition allows for 'drill down' to detailed levels all the way down to the individual transaction.
Conventional metrics do not, however, incorporate the impact the activities of the organization are having on the external world. Everything is focused on the performance of the organization and all the impacts on people, planet (environment), society, etc. are ignored. To a great extent, it is only legislation and regulation by government that gets the attention of the business organization to these externalities.
MDIA is a system of accounting that incorporates conventional money accounting, but also includes all the transactions that have impact on all the capitals, not just the money capital or financial capital.
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Navigation within this page
Go to Output / Products
Go to Materials / Supply Chain
Go to Energy
Go to Payroll
Go to Plant
Go to Process
Go to Philanthopy
Go to Taxation
Go to Enabling Environment
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Outputs / Products
The revenues are a function of the output and the price. To the buyer this price becomes a cost. For the seller, the profit is the amount the revenues exceed the costs. The impact of the product is a function of the early supply chains, the latest process, the use stage and the post use waste stage. For a full understanding of the product, the whole life cycle needs to be taken into consideration. Modern technology is enabling more information about the price of a product and what others think about the product, but the technology has not yet been applied to providing information about the impact the product is having on the complete enviro-socio-economic system.
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Input Materials / Supply Chain
All materials that are inputs into a production process have purchase price which becomes the cost of the input. But this is not just a single simple number, it is also a number that reflects the whole history of the supply chain. In order for the material to get to the point of purchase it has already gone through a chain of processes all with a full range of elements of cost and impacts on everything. Each material going through a process has cost along these lines: materials, energy, labot payroll, labor benefits, taxes on labor, plant and equipment costs, advertising, financial costs, pro-good expenditures, government taxation, distributions to owners and retained profit. All of these are money costs to the business, but these costs also have impact on the people and place where the process is located.
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Open L0700-TVM-n8-Economic-activity-1
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Energy
The financial and impact accounting for energy is similar to that of materials in that there is a supply chain, and the use of energy in a process results in both benefits for the process, but also impacts on the environment. The accounting logic is the same, but the computation of impact is based on a different set of standard impact values. There are standard impact values for each type of energy: electricity from hydro is different from electricity from coal, for example. Electricity from wind or solar has a different standard.
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Open list0300--MDIA-Energy
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Payroll
Payroll costs include the labor payroll, the labor benefits and maybe also taxes assessed on labor. These are all costs to the business (economic activity / process). However, these expenditures are also very important benefits to the individuals concerned and their families and the broader society in which they live. In economic analysis there is the impact of the 'multiplier' which associates the money earned in one activity with the money that subsequently flows through the economy in other activities. This has been computed recently in the Local Multiplier 3 (LM3) initiative for different locations in the UK, but is widely understood in economics. In the end it is payroll that funds aggregate demand. There is however, the perverse problem of more payroll is good for the broader economy but a lower payroll is good for the profit of the organization and the wealth of the owners. Productivity enables a lower payroll and more profit, but this sam productivity can end up destroying aggregate demand. In the short run the business does well. In the long term the business fails.
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Open list0300--MDIA-Payroll
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Plant and Equipment
An economic activity usually has some plant and equipment that is needed for efficient production. This plant and equipment has a capital cost. It also needs maintenance. The cost of using plant and equipment should be factored in using depreciation and accruals for maintenance that is being deferred.
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Open list0300--MDIA-People
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Process
The process transforms products that are inputs into the products that are outputs. The technology and efficiency of the process determines both money costs and environmental and social impacts.The cost and impact of process may be represented by standard costs for the various aspects of the process.
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Open list0300-MDIA-Product
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Philanthropy
Philanthropy or 'Pro-Good-Expenditures' have a cost that is a charge against the profit or surplus of the organization, but the activities that are funded with this money may have an important impact on the environment and on society depending on the activities. In some situations the cost of philantrhopy reduces the cost of taxation which increases surplus but reduces the impacts associated with the payment of taxes.
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Taxation ... payments to Government
Taxation and other payments to government have a cost that reduces the profit or surplus available for distribition to investors, but the funds that flow into government are essential for the funding of government and the services that government has to provide in a modern society. The idea that less government is always better is wrong. The issue is the efficiency of government and the quality of the programs that are implemented.
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Open list0300--MDIA-Taxation
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Enabling Environment
The enviro-socio-economic system is very complex. Value adding economic activity is essential in order to support quality of life and standard of living, and for this activity to thrive there must be an efficient enabling environment. This means that there must be a system of laws and justice so that economic transactions can take place with a minimum of risk, that investments may be made, and so forth. In many places around the world setting up a business is a very difficult process that costs in both time and money, and in many places economic transactions are constrained in all sorts of ways. Business flows most easily with an enabling environment that has the least rules, but at the same time, too little of rules and regulation also may result in a range of abuses like inadequate workplace conditions, inappropriate exploitation of labor and pollution of the environment. Getting the balance right between ease of operation and good practice that has favorable impact for society and the environment is important and not easy.
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Open list0300--MDIA-People
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