As per disclosure norms set by SEBI, companies have to report their financial performance on a quarterly and annual basis. Apart from financial data, the annual report also contains valuable information such as information about the company’s products and services, management vision and guidance, major recent accomplishments, changes in leadership, mergers and acquisition related activity, any significant regulatory changes, etc.
Let’s take a look at types of Financial Statements.
Profit & Loss Account (P&L A/c)
The Profit & Loss account shows the financial performance of the company over a period of time. It summarizes the revenue, costs and expenses incurred during a specific period of time usually a quarter or year.
Eg.: Annual Result (period of 12 months) – for the year ending 31st March 2010.
Quarterly Result (period of 3 months) – for the quarter ending 30th June 2010.
Below is an example of a P&L account for the year ending 31st March 2010.
Analysis of Key Line items of the P&L Statement
The income generated by a company from sale of goods or services after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company’s financial statement is a net sales number, reflecting these deductions.
Raw Material Cost
This is the cost of direct materials required to produce the volume of goods sold.
Trading goods represent goods purchased to manufacture finished products. In the P&L, trading goods form a component of raw material cost. For any company, the cost of these goods should not exceed 30% of the raw material cost. However, distribution companies are an exception and the cost of trading goods is usually a high percentage of raw material cost.
The actual amount paid for all employee wages, salaries, commissions, etc. and benefits such as employer paid insurance premiums, pension deposits, medical benefits as well as the cost of all other fringe benefits. Employee cost as a percentage of sales usually tends to be higher for service oriented companies, where the main requirement is skilled talent. It may tend to be lower for manufacturing companies using automation. The employee cost as a percentage to sales however should be in-line with the industry and any variance should be investigated.
The actual amount paid for power consumed to produce the volume of goods sold. Power costs usually tend to be higher in the heavy manufacturing sector, as big machines are involved.
These allocate the cost of an asset over its useful life. For example, if a company buys a machinery for Rs. 100,000 and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will add an expense of Rs. 10,000, which will be matched with the money that the equipment helps to make each year. IT companies usually tend to have higher depreciation rates due to lower useful life of computers.