# Profit and Loss statement analysis for Fundamental analysis

Introduction: Balance Sheet and P&L are the most objective way of looking at the financial position of a company. P&L statement reports a company's financial performance over a specific period of time by providing a summary of how the business incurs its revenues and expenses. It is the document that an investor uses to judge the profitability of the business for the period. Following are smart pointers as to how to interpret a P&L statement. Latest annual report of Infosys here is used as a reference. Please note that from an investors point of view what is of utmost importance is the Consolidated Profit and Loss statement vis-a-vis the Standalone Profit and Loss since the Consolidated P&L accounts for the share of profits of the company's subsidiaries as well.

## What is P&L statement?

Statement of profit and loss captures the revenues and expenses a company has incurred from both operating and non-operating activities over a specific period of time, say a quarter or a given financial year as specified in the heading. [caption id="attachment_2582" align="aligncenter" width="655"] P&L Statement Heading[/caption] It is also called income statement, and captures the elements of the following equation: Profit = Revenue Less Costs. P&L statements unlike balance sheets are additive in nature. The revenues/costs/profits for a financial year is equal to the sum of revenues/costs/profits for all the quarters within the financial year. This statement is based on the accrual method of accounting i.e. revenues and expenses are recognized as and when they are incurred. The alternative is to recognize revenues and expenses on a cash basis i.e. when revenue is collected from clients and when payments are made to vendors/suppliers. To better understand, consider the following example: A businessman (ABC) procures computer parts from his supplier (LMN) assembles them into computers and sells them to a customer (XYZ) every month. As per terms of the contract, XYZ pays ABC on a quarterly basis and ABC pays LMN once XYZ has made payments.
Jan Feb Mar
Goods sold to XYZ (in Rs.) 130 140 150
Cost of computer parts procured from LMN (in Rs.) 60 70 80
Payments made by XYZ to ABC (in Rs.) 0 0 420
Payments made by ABC to LMN (in Rs.) 0 0 210
In the accrual method of accounting, P&L would appear as below
Jan Feb Mar
Revenue (in Rs.) 130 140 150
Costs (in Rs.) 60 70 80
Profits (in Rs.) 70 70 70
In the Cash method of accounting, financial statements would appear as below
Jan Feb Mar
Revenue (in Rs.) 0 0 420
Costs (in Rs.) 0 0 210
Profits (in Rs.) 0 0 210