Reading a P&L
Walk a profit-and-loss statement from revenue down to net income.
In your head, jot if needed · no calculator why?
Opens at level 6.
the lesson
Read the lesson
The idea
A P&L (profit-and-loss statement) covers a period, like a month or a year. It walks down from what the business sold to what it kept, taking one kind of cost away at each step.
Each step has a name. Gross profit is revenue minus the cost of the goods or services sold. Operating profit takes away operating expenses, like rent and salaries. Pretax income takes away interest. Net income takes away income tax, and only that last line is the final profit.
So when someone says "profit", ask which one.
Techniques
Walk down the statement
- Revenue minus cost of sales is gross profit.
- Take away operating expenses for operating profit.
- Take away interest for pretax income, then income tax for net income.
worked example
A bike shop has revenue of $50,000, cost of goods sold of $30,000, operating expenses of $12,000, interest of $1,000 and income-tax expense of $2,000. What is net income?
- Gross profit: $50,000 − $30,000 = $20,000.
- Operating profit: $20,000 − $12,000 = $8,000.
- Pretax income: $8,000 − $1,000 = $7,000.
- Net income: $7,000 − $2,000 = $5,000.
Answer: $5,000
Name it by what is gone
- Ask which costs have come out so far.
- Cost of sales only: gross profit. Operating expenses too: operating profit.
- Interest too: pretax income. Income tax too: net income.
- Sales minus refunds and discounts is net revenue, the top line.
worked example
Gross profit is $15,000 and operating expenses are $9,500. What is operating profit?
- $15,000 − $9,500 = $5,500.
- Interest and tax are still in, so this is not net income.
Answer: $5,500
Tips by skill
- TipGross profit: Revenue minus the cost of goods or services sold. It is the first subtotal, not the final profit.
- TipOperating profit: Gross profit minus operating expenses. If the expenses are bigger, it is a loss: use a minus sign.
- TipDown to net income: Take away every line in order: cost of sales, operating expenses, interest, then income tax.
- TipName that subtotal: Ask which costs are gone. Cost of sales: gross. Operating expenses: operating. Interest: pretax. Tax: net.
Watch out for
- Calling gross profit the final profit. Operating expenses, interest and tax have not come out yet.
- Stopping at operating profit when the question asks for net income.
- Using operating profit and net income as if they were the same number.
skills · practice stats
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Gross profit not tried yet
worked example
Monthly revenue is $78,000 and cost of services is $52,000. What is gross profit?
Answer: $26,000.00
- Gross profit = revenue − cost of services = $78,000 − $52,000 = $26,000.
- It's the first subtotal, not the final profit.
-
Operating profit not tried yet
worked example
Gross profit is $11,500 and operating expenses are $5,500. What is operating profit? (Use a minus sign for a loss.)
Answer: $6,000.00
- Operating profit = gross profit − operating expenses = $11,500 − $5,500 = $6,000.
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Down to net income not tried yet
worked example
Revenue is $58,700, cost of goods sold is $10,400, operating expenses are $25,200, interest expense is $1,600, and income-tax expense is $4,200. What is net income?
Answer: $17,300.00
- Gross profit = $58,700 − $10,400 = $48,300.
- Operating profit = $48,300 − $25,200 = $23,100.
- Pretax income = $23,100 − $1,600 = $21,500.
- Net income = $21,500 − $4,200 = $17,300.
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Name that subtotal not tried yet
worked example
Gross profit $70,000 minus operating expenses $38,000 = $32,000. What is $32,000 called on a P&L?
- Net income
- Operating profit
- Gross profit
- Pretax income
Answer: Operating profit
- The P&L steps down: net revenue → gross profit → operating profit → pretax income → net income.
- Gross profit minus operating expenses is operating profit.
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