Thread by @ICICI_Direct

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Here is the 2nd part of our series on Fundamental Analysis📈

Let’s learn about Revenue, Cost, Taxes, EPS and many more

Let's understand a Profit & Loss Account

A thread 🧵👇 #LearnwithICICIDirect

[A] What is Profit & Loss Account (P&L)?

🔶It is a statement of Company's Revenue, Cost & Profitability

🔶Simply, it's a snapshot of what Company earns and how it spends money

🔶It is prepared for the specific period

🔶Also known as Income Statement

Check out the image👇

[B] What are the Components of BS?

🔶Income: How much the company earns
🔶Expenses: How much the company spends
🔶Profit/Loss: Net earning of the Company

Mathematically,
Income - Expenses = Profit/Loss

Let's understand in detail

Contd.

Check out below image 👇

Shown in the image is the simplified form of P&L A/c

It flows from Top to Bottom.

That's why Net profit is known as the Bottom line of the Company.

P&L also discloses EPS i.e. Earnings per share (Calculated as Net Profit/Total No. of Shares)

[B.1] - Income

Income includes:

🔶Revenue from Operations i.e., Sales from Core business [Can be bifurcated into Sale of Products and Sale of Services]

🔶Other Income i.e., Income from non-operating activities such as dividend, Interest, Forex Gain/loss, etc.

Check image 👇

[B.2] - Expenses

Expenses are the costs that a business incurs to run the business

It includes:
🔶Cost of Material Used
🔶Salary to employees
🔶Interest
🔶Depreciation
🔶Taxes
🔶Advertisement Expense
🔶Commission
🔶Repairing Cost
🔶Other expenses

Check image below👇

[C] How it is prepared?

🔶Based on accrual accounting
🔶Prepared for a specific period
🔶With comparative figures
🔶Prepared Quarterly for listed companies

[D] How it is Used?

🔶To evaluate growth in Business
🔶To assess whether Co. made money or lost during the period
🔶Helps in gaining insights into financial Position of Co.
🔶Used for Calculating several ratios
🔶Further, it's used by several stakeholders for different purposes

[E] Limitations of P&L A/C

P&L doesn't capture the entire picture always

E.g. it doesn't consider
🔶Loss of Valuable Employees
🔶Cash Realization of Profits
🔶Window dressing could be possible through several means

Let's understand Window dressing in detail 👇

Contd.

[F] Window Dressing

Simply, it is a superficial or misleading presentation of F St. to create favourable impression

It includes methods such as:
🔶Revaluation of assets
🔶Heavy discount or commission to boost sales
🔶Changing the method of depreciation
🔶Sale and leaseback txn.

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TL;DR

[1] What is P&L A/c
[2] Components of P&L A/c
[3] What is Income
[4] What is Expense
[5] How P&L A/c is prepared
[6] How P&L A/c is used
[7] Limitations of P&L A/c
[8] What is Window dressing

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