An income-and-expenditure report is also known as a statement of profit and loss, income statement, statement of income or P&L. Regulatory guidelines -- including generally accepted accounting principles and international financial reporting standards -- allow businesses to prepare P&Ls using either of two formats. These include multiple-step and single-step.
The income statement of a financially struggling company tells readers and investors why the business is enduring competitive tedium, how it is coping with it and how long corporate leadership intends to right the organization's operational ship. In essence, a P&L tells financiers whether the business made or lost money over a given period, the company's competitive rank and whether employee morale -- like sales numbers -- are sinking because of a bad economy. Besides an income statement, a business publishes other financial data summaries to share its version of the economic reality. These are a statement of cash flows, a statement of retained earnings and a statement of financial position, also known as a balance sheet.
The single-step income statement format is the simplest that generally accepted accounting principles and international financial reporting standards recommend. It enables an organization to list all revenue items at the top and all expenses at the bottom. For example, the trial balance of a publicly traded company shows the following data: sales $1 million, investment gain $500,000, other revenues $300,000, cost of goods sold $200,000, SG&A expenses $100,000 and other charges $100,000. SG&A expenses are selling, general and administrative charges -- and run the gamut from salaries and insurance to litigation and office supplies. To prepare a single-step income-and-expenditure report, a corporate accountant adds revenue items up and finds $1.8 million, or $1 million plus $500,000 plus $300,000. The accountant also aggregates all expenses and finds $400,000, or $200,000 plus $100,000 plus $100,000. At the bottom of the single-step P&L, net income is $1.4 million, or $1.8 million minus $400,000.
The multiple-step format for income-and-expenditure report preparation categorizes P&L items by operational importance. Accountants start with gross revenues and material costs, using both metrics to determine gross profit. Then they subtract all operating, or core, expenses from gross profit to determine operating income. Next, financial managers subtract non-operating items -- such as one-time gains and losses -- from operating income to calculate income before taxes. After deducting money the business owes the taxman, accountants calculate net income for the period, which also may be a net loss if expenses exceed revenues.
A company's P&L format is important, but what really matters is the bottom line -- which is the ultimate metric that investors heed. Financiers also study income data based on the company's operational context. For example, they may determine how a small business navigates the ups and downs of the economy and marketplace conditions. For a multinational company, investors may pay attention to how top leadership helps the organization make money overseas, as well as how senior executives stitch together the frayed seams of international operations.