Accounting For Dummies®, 4th Edition

14.3. Culling Profit Information

NOTE

The sales and expenses of a business over a period of time are summarized in a financial statement called the income statement. Profit (sales revenue minus expenses) is the bottom line of the income statement. Chapter 4 explains the externally reported income statement, as well as how sales revenue and expenses are interconnected with the operating assets and liabilities of the business. The income statement fits hand in glove with the balance sheet.

Chapter 9 explains internal profit reports to managers, which are called P&L (profit and loss) reports. P&L reports should be designed to help managers in their profit analysis and decision making. Chapter 9 is the logical take-off point for this section, in which I discuss the types of profit information managers need.

14.3.1. Margin: The catalyst of profit

A business makes profit by earning total margin that exceeds its total fixed expenses for the period. Margin equals sales revenue minus all variable expenses of generating the sales revenue. Cost of goods sold is the main variable expense for companies that sell products. Most businesses have other significant variable expenses, which depend either on sales volume (the quantity of products or services sold) or the dollar amount of sales revenue. P&L reports to managers should separate variable from fixed operating expenses, in order to measure ...