Chapter 14 – Producing A Profit

Overview

You will be happy to know that the hard work has been done and this chapter should be very straightforward. It takes the revenue and spending discussed in the previous chapters, introduces a few new categories of spending and receipts, and brings them all together in the profit and loss account (or income statement). This shows the bottom line for the business, or, perhaps, the bottom lines since, believe it or not, there is more than one. The profit and loss account is one of three key financial statements. The other two are the balance sheet and cash flow statement, which are covered in the next two chapters. Some introductory analysis and interpretation are discussed in this chapter, but the real secret of analysing the profit and loss account is found by taking it in combination with the other two financial statements. Accordingly, detailed analysis is deferred until Chapter 17.

Mastering profits

After reading this chapter, you should be able to answer the following questions:

• What is operating profit? profit from ongoing operations? net profit?
• What is comprehensive income?
• Why distinguish between recurring and non-recurring non-trading income?
• What is the difference between extraordinary and exceptional income?
• Why are extraordinary events, discontinued operations and changes in accounting policies treated as unusual items?
• Why is the classifiction of other unrealized gains and losses applied to bookkeeping gains and losses on foreign currency translations, investments and derivatives?
• What are minority interests?
• Why use earnings before interest, tax, depreciation and amortization (EBIT and EBITDA) when comparing companies?
• Why distinguish between manufacturing, trading and operating accounts?
• How would you use the figures from the previous few chapters to project net profit?