There are three financial statements that every company needs to understand, review and produce, on an annual basis, at a minimum. These consist of the Profit and Loss statement (P&L), Balance Sheet (BASH) and the Cash Flow statement. The profit and loss statement, also commonly known as the income statement, shows the changes in the company’s profitability over the course of time. The profit and loss can be reported in either the Cash or Accrual method. The cash flow statement is similar, however it shows the company’s income and outlays in a cash methodology only. The balance sheet reports the company’s assets and liabilities in a specific snapshot of time.
The P & L reports all of the income, or revenue, that the company receives through its normal course of business. This is often known as the “top line.” You subtract the costs associated with doing business, which can consist of Cost of Goods Sold for product related businesses, and ordinary operating expenses. Once loss is subtracted from the “top line” income, the end result is known as the “net income” or “bottom line” and is the profit, or earnings of the business. The profit and loss statement is often used to calculate metrics which include gross profit margin, product profit margin, operating profit margin, net profit margin, and operating ratios.