In our previous blog, we discussed that the P&L statement is a financial document that shows an entity’s generated revenues, expenses and the profit or loss during the period in question. We also touched that it is an indicator of the financial health of your company based on its ability to generate income through sales, manage expenses and sustain a healthy profit margin. However, it is pertinent to state that when used together, the P&L statement, balance sheet, and cash flow statement provide an in-depth look at a company’s overall financial performance. It is one of the three financial statements that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
Worthy to mention is that it is very important to compare a company’s P&L statement from different accounting periods and this is because any changes in revenues/sales, operating cost, research and development spending and the net profit over time are more than just figures themselves. A company’s revenues may grow steadily while its expenses could grow at a much faster rate. This is a situation that left uncorrected for a long while could be detrimental to the health of the company.
In accounting, we have what we call time series and cross-sectional analysis. When you compare the financial statements of a company with that of the earlier accounting periods, you refer to Time Series Analysis. In Cross sectional Analysis, you compare the company’s results with other company(s) that are similar in size within the industry or you compare your results with an industry average/benchmark. This comparison can further help investors evaluate the financial well-being of a company. For example, doing so might reveal that one company is more efficient at managing expenses and has better growth potential than the other.
In preparing the balance sheet, we use the accrual accounting method which records revenue when it is earned and cost when it is incurred and not when cash is received or paid. This means that a company using this method accounts for money that it expects to receive in the future. For example, a vehicle servicing/repair company records revenue on its P&L statement after repairing a vehicle, even though it is yet to receive payment. Liabilities on the other hand, are accounted for even when the company has not yet paid for any expenses.
It is also important to know that publicly traded companies are required to prepare P&L Statements and must file with the Securities and Exchange Commission (SEC) so they can be scrutinized by investors, analysts and regulators. Publicly traded companies are companies whose shares are registered by and traded on the Nigeria Stock Exchange. Companies are also required to comply with a set of rules and guidelines known as Generally Accepted Accounting Principles (GAAP) when they prepare these statements. The importance of preparing the P&L statement and other components of the financial statements and filing with the Securities and Exchange Commission cannot be overemphasized.
##To be Continued
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