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Understanding the P&L Statement


Overview of the financial statements



You can think about the financial statements from two different angles:


From the user’s perspective
A maker prepares the financial statements. He is typically a person with an accounting background. His job involves preparing ledger entries, matching bills and receipts, tallying the inflows versus the outflows, auditing etc. The final objective of the is to prepare transparent financial statements which best represents the true financial position of the company. To prepare such a financial statement certain skills are required, usually these skills are developed through the rigor of a Chartered Accountant’s training program.

The user on the other hand just needs to be in a position to understand what the maker has prepared. He is just the user of the financial statements. He need not really know the details of the journal entries or the audit procedure. His main concern is to read what is being stated and use it to make his decisions.

To put this in context, think about Google. Most of us do not understand Google’s complex search engine algorithm that runs in the backend, however we all know how to use Google effectively. Such is the distinction between the maker and the user of financial statements.

A common misconception amongst the market participants is that, they believe the fundamental analyst needs to be thorough with concepts of financial statement preparation. While knowing this certainly helps, it is not really required. To be a fundamental analyst, one just needs to be the user and not the maker of the financial statements.

There are three main financial statements that a company showcases to represent its performance.

The Profit and Loss statement
The Balance Sheet
The Cash flow statement
Over the next few chapters we will understand each of these statements from the user’s perspective.



The Profit and Loss statement


The Profit and Loss statement is also popularly referred to as the P&L statement, Income Statement, Statement of Operations, and Statement of Earnings. The Profit and Loss statement shows what has transpired during a time period.  The P&L statement reports information on:

The revenue of the company for the given period (yearly or quarterly)
The expenses incurred to generate the revenues
Tax and depreciation
The earnings per share number
From my experience, the financial statements are best understood by looking at the actual statement and figuring out the information. Hence, here is the P&L statement of Amara Raja Batteries Limited (ARBL). Let us understand each and every line item.














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