When a company tallies up the income [1] for a quarter or a year, then deducts expenses and comes up with a net income [1], they have completed a profit and loss statement [2].
Every company keeps a balance sheet [3] documenting transactions on a daily basis, but a profit [4] and loss statement summarizes these daily transactions on a quarterly or yearly basis.
The statement is presented to investors and other interested parties to show the viability of a company, how much profit has been generated over the documented period and where the company is headed financially.
Once tax, operating and interest expenses, along with the costs of purchased goods, are deducted from the generated income, the net profit [4] is arrived at.
To get a better idea of the health and growth of a company, a statement documenting cash flow [5] is imperative.
Although cash flow documentation is important to creditors and investors, it is the profit and loss statement that is used to access past and possible future performance.
This statement presents all the tangibles, but personalities, discretion, persistence, integrity and other non-tangibles are often the tipping point in making investment decisions when a company’s net profits are minimal. With the right management team, a firm with energetic and respected employees can often turn a company around.
This statement is of utmost importance, but investors and creditors need to carefully consider all aspects of a company when making decisions about lines of credit or the buying of company stock.