Understanding your P&L statement part 2

• Operating Income is shown as a subtotal on P&L statements. The amount of operating income is shown before the provision for income tax and before investment income, interest expense, or other non-operating income or expense items.
  • You can find this number by using this equation:

Operating Revenues – Operating Expenses = Operating Income

• Interest Expense is the cost of borrowing money during a specified period of time. Occurs daily, but interest is likely to be paid monthly, quarterly, semiannually, or annually.
• Earnings Before Tax (EBT) is the last subtotal found in the P&L statement before the net income line item. EBT metric is calculated after all deductions, except taxes, have been made against sales revenue.
• Tax Expense is the amount of tax owed for a given period. For a P&L statement, this is a one-year period. This can be calculated using the below formula

Effective Tax Rate x Taxable Income = Tax Expense

• Net Income/Net Earnings is the residual amount of earnings after all expenses have been deducted from sales (i.e., the final amount of profit or loss after all expenses are included).

Keep these key terms and an example of a P&L statement close by downloading the handout below. Want more finance talk? Visit our other resource on operating income here.

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