Profit and Loss Statement

Q. Why are we learning profit and loss statement?

A. We are learning PL statement for two reasons:

1. Professional accounting
2. Evaluation of companies to select share

IT IS ALSO CALLED INCOME EXPENSE STATEMENT

Q. What is its formula?

A. The formula is “Revenue-Expenses= Income”
PL statement start with revenue which is called “Top line”
Although everything in PL statement is important some of most important numbers in PL statement are.
1. Revenue
2. Operating profit
3. EBIDTA
4. Interest paid
5.Tax paid
6. Net profit
7. Dividend paid.
TDS of MPTDS formula comes from PL statements

Q. Should the amount of profit earned by a company correlate with the market capital? How do we draw inference that Market cap is indirectly linked to profit?

A. Market cap = No. of shares x price .
PE ratio = Price /EPS
PE Ratio x EPS = Price
Market cap= PE Ratio x EPS x No of shares.
Purely mathematical equations

Q. Do the cost acquired in construction of company or hospital shown in PL statement?

A. Hospital construction cost is CAPITAL EXPENDITURE. (CAPEX)
Capital expenditure is capitalized over many years (8-12) and cost is shown as
DEPRECIATION in profit loss statement

Q. What are the types of expenses?

A. Expenses are of TWO types
A. Capital Expenditure: Consumed over many years.. Eg. building, machines, car
B. Revenue Expenditure: Consumed within a year- Food, light bill, medicines, books etc…

Q. Do consistently profit making companies always show relative increase in stock price?

A. YES
Profit making company price goes on increasing. Some time price go very high then it corrects but never goes below certain PE.
e.g. Reliance EPS is 50.
It will never go below Rs 600
At PE 12 people would buy

Q. If company owner purchases a car, which is used for company as well as personal purpose , can it be shown in PL statement in the form of depreciation?

A. YES.

  • You need to decide how much personal and how much professional.
  • If profession purpose car runs 10000 km and personal 5000 km.
  • Then depreciation is allowed as per ratio

Q. What is the difference between balance sheet and PL statement?

A. PL statement is income and expense statement of certain DURATION..e.g. Year
BL sheet is statement of Asset , Equity and Liability on particular DATE..e..g . 31 March

Q. Is it possible that company earns profit and not pay tax?

YES. If income is NON Taxable e.g. DIVIDEND or Agriculture income then NO Tax is paid.
If there is Carry forwarded loss then its set off and No tax is payable.

Q. What is the significance of EBITDA, PBT & PAT ?

A. EBIDITA is operating profit. It is useful to determine whether the business activity is making profit or not.
PBT is the Profit before payment of the tax.
PAT is Net profit left after spending and tax