Did you like how we did? Rate your experience!



46 votes

The statement of profit and loss has more than one profit number.?

The reason that there can be more than one number for profit on the profit and loss statement depends on how cynical you are and if you are a manager or an investor. If you are the manager of a business you will want to identify a profit number that tracks how your business is performing - hopefully your profit is growing. Finding this number sometimes runs into conflict with GAAP (generally accepted accounting principals) and/or tax rules. Some of the numbers you may see are: Earnings/Net Income - this includes subtractions for all the GAAP expenses EBIT (Earnings before interest and taxes) - as a manager you may decide that this number gives me a better view into how the business in performing since taxes are something that you cant control and interest (say for the loan to purchase the business) is just a fixed cost. Removing these non-operating costs gives me a better handle on the business. EBITA/EBITDA (Earnings before interest, taxes, amortization, depreciation) - this number removes the costs associated with long lived assets. The large piece of equipment that you purchased needs to be expensed over its useful life. As a manager the depreciation expense may be larger than the profit from your ongoing business removing the depreciation may give you a better view into the operation of your business. Investopedia has useful set of definitions which can be found here: EBITA Ive also seen management present numbers that remove currency fluctuations and various other items. If you sold or acquired another business part of the way through the financial accounting period there may be adjustments to take that sale/purchase into account - you will sometimes see a line for earning from discontinued operations or something similar. The goal as the manager or owner of the business is to find the set of numbers that help you manage and hopefully grow the business. You can present these number to your stakeholders/shareholders to show how the business is operating. If you are selling a business the goal will be to find the numbers that put your business in the best light and garner the highest sales price. As a cynic and an investor, you need to understand that management will present the earnings of the company in a way that puts them in the best light since the sales price of the business or their compensation can depend on the earnings of the company. Some unscrupulous managers will show you an EBITDA number that is growing but fail to disclose that much of the increase in profit comes from the purchase of a new piece of equipment (depreciation) or the purchase of a company (amortization) and have conveniently left the expenses associated with that gain in profit out of the data. If you are the investor or the buyer, you need to be aware of the numbers that are being presented. I do not want to imply that all the variations are earning are bad. Many of them can be helpful in running your business but you need to remember that any additions or subtractions from earnings can be abused or can misrepresent the operations of the company.

Loading, please wait...