Finance and Management - 33

In the last blog, we looked at why a corporate would be asked to pay taxes. In today's blog let’s look at the P&L shown in this link a bit more closely and understand the way it is constructed.

Simply put, Profit is defined as selling price - cost price. Now for a company, the revenue is generally got when its products/services are sold out. This is indicated as the title Sales. To get each of these products or services out, we would have spent a particular amount and this is indicated by the title, Cost of Goods Sold (COGS). So, profit definition would be re-written as

Profit = Sales - COGS

Now at this point, we still haven’t considered some of the concepts we learnt like - depreciation, amortization and taxes. So we cannot call this profit as the final profit we instead call in "Gross Profit".

Companies indulge in a lot of R&D activities, and these activities don’t necessarily get over in a year - a certain amount is spent on it each year. So this is indicated by the title - "General Operating Expenses (R&D)" in addition, for the patents and fixed assets, it is mandatory to have an amount paid of every year so we have to subtract these too from the profit. Once we remove these General operations expenditure and amortization we get what we call the "Operating Income". Though they are not directly related to the product or service sold, these expenses are to be considered to really look at what would come to the company's kitty - hence are called "Operating Income".

Now covering the remaining concepts on the P&L account would become an over doze today, hence we will leave the remaining for tomorrow's blog.

Read in Kannada:
http://somanagement.blogspot.com/2011/09/blog-post_30.html