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9.16: Profit-and-Loss Statements

  • Page ID
    45149
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    Learning Objectives

    • Analyze a profit-and-loss statement

    The income statement is an accounting tool that reports a company’s financial performance over a specific period, providing a summary of the business’s revenues and expenses from operations and non-operational activity. Below, you’ll find a sample income statement for XYZ Retailers. We will use this statement to analyze and understand the importance of financial statements for retailers.

    XYZ Retailer
    Income Statement
    Year Ended 30 June 2011
    REVENUE
    Sales $250,000
         Cost of Goods Sold
         Opening inventories (as of 1 July 2010) 40,000
         Add purchases 100,000
         Add freight-in and customs duty 10,000
         Less closing inventory (as at 30 June 2011) 60,000
    Less Cost of Goods Sold 90,000
    Gross Profit 160,000
         Add other operating revenue
         Rent received 3,000
         Commission received 2,000
    Total Revenue $165,000
    LESS OTHER OPERATING EXPENSES
         Selling & Distribution expense
         Advertising 5,000
         Public Relations 2,000
         Website marketing 7,500
         General and Administrative expenses
         Depreciation 10,000
         Electricity 1,500
         Insurance 1,000
         Rent expense 30,000
         Wages & salaries 46,500
         Financial expenses
         Bad debts 1,500
    Total expenses 105,000
    NET PROFIT (EBIT) $60,000

    As you can see, XYZ has net sales revenue of $250,000, given that there are no discounts or allowances to apply to reduce their sales. But, it may be more difficult to understand how to determine COGS (cost of goods sold). In truth, we have to understand how the XYZ operates and what the accounting entries mean.

    In this case, XYZ had $40,000 in inventory on-hand, when the accounting period opened on 7/1/17. That simply means they had product in their inventory, such as boxes and cans sitting on their shelves and in their backroom. During the period, they made $100,000 in additional purchases to bring in more inventory. To this they add freight and customs expenses of $10,000. So, for the period, their total accumulated inventory would have been $150,000 ($40,000 + $100,000 + $10,000).

    But, at the end of the period, they have only $60,000 of inventory on-hand. What happened to the rest? Easy. It was sold. So, we now know the COGS is $90,000 ($150,000 accumulated inventory – $60,000 ending inventory). Thus, we can see that sales net of COGS is $160,000 ($250,000 in revenue – $90,000 in COGS). Further, we see that XYZ has some non-traditional revenue streams: rent ($3,000) and commissions ($2,000). We add these to get a total net revenue of $165,000.

    However, as we learned earlier, businesses incur other operating expenses. For XYZ, these are related to selling and distribution, general and administrative, and financial. In total, they sum to $105,000 ($14,500 in selling and distribution + $89,000 in general and administrative + $1,500 in financial) and are deducted from the total net revenue to show $60,000 in net profit (EBIT or earnings before interest and taxes).

    While the numbers are straight forward, it’s the meaning behind them that’s most important and telling for a decision-maker, looking to improve the financial performance of the organization. That is, they reflect what is happening in the business’ operations for better or for worse. For example, the closing inventory is $20,000 greater than the opening inventory. Does this reflect a slow down in sales or a ramp-up in inventory on-hand to accommodate seasonality? If we compared these results against past periods, what we would learn about changes selling and distribution expenses? Wages? Are these costs increasing or decreasing? And, at what rate are they increasing/decreasing relative to revenue and profit?

    As you can see, the income statement provides important information about the financial performance of the firm, helping decision-makers understand where to focus to improve going forward. The following video, which uses Walmart as an example, may be a helpful tutorial to broaden your understanding of income statements.

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    Contributors and Attributions

    CC licensed content, Original
    • Profit-and-Loss Statements. Authored by: Patrick Williams. Provided by: Lumen Learning. License: CC BY: Attribution
    All rights reserved content
    • How to analyze an income statement - Walmart example (case study). Authored by: The Finance Storyteller. Located at: https://www.youtube.com/watch?v=jovKWaUxdmU. License: All Rights Reserved. License Terms: Standard YouTube License

    9.16: Profit-and-Loss Statements is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by LibreTexts.

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