Use of Profit and Loss Account Balance Sheet and Cash Flow Statement

Profit and Loss Account is an important financial statement from the lender’s point of view in order to arrive at a lending decision. This financial statement evaluates the operational and other activities of an entity over a fiscal period, though it may be drawn for any period of business activities say for a month, quarter, half-year, or for a year.Profit and loss account contains information about revenue (or sales), costs of sales, beginning and ending inventories, operational expenses details, interest and other financial expenses, and information about taxes as well. A comparative analysis of revenue or sales from the previous few years of profit and loss accounts will provide the marketability trends of the product being dealt in. In the case of a restaurant, revenue will be from the sale of eatables and drinks. If sales are continuously rising there is every possibility that fresh loans when invested in the business will bring more revenue to generate extra profits. Cost of sales provides an idea about the nature of expenditure involved that directly fluctuate with sales and their effect on profitability. If for example loaned funds are used for purchasing kitchen equipment of the restaurant, then depreciation on machinery being manufacturing cost will enhance the costs of sales and thus reduce the margins if expected increase in revenue is not generated. That is why a ratio generated by profit and loss account called ‘Gross Profit Margin’ has gained importance in analyzing the results, particularly during the inflationary period. “The gross profit margin measures the percentage of each sales dollar remaining after the firm has paid for its good.” (Lawrence J. Gitman, page 67) The expenditure recorded in profit and loss account after calculating the gross profits are called below the line expenses and help in computing operating and net profits. Mostly these are overheads and the lender can have an idea about fixed and variable nature of overheads like rent of the restaurant, insurance expenses are fixed and have to bear out even whatever the level of sales or profits, etcThe expenditure recorded in profit and loss account after calculating the gross profits are called below the line expenses and help in computing operating and net profits.