Profit & Loss Statement (a.k.a. “P & L”, or Income Statement)

1. Income (total revenue) Expenses Fixed Costs COGS (Variable) Depreciation Total Expenses Gross Profit (Income - Expenses) State & Federal Taxes (~40%) Net Profit (“Bottom Line”) $100K $25K $50K $10K -$85K $15K -$ 6K $ 9K Profit & Loss Statement(a.k.a. “P & L”, or Income Statement) EGR 403 - Cal Poly Pomona - SA1

2. What Happens to Net Profit? • “Dividends” are paid to owners (share holders) as part of their return for investing in the business. Their money is at risk. • Example: $9K Net Profit • $3K to dividends (1/3 used here as example) • $6K retained in the business • Dividends are considered “personal income” for shareholders and therefore taxed again (double taxation). So the majority of corporate profits go to taxes. (note to those listening to narrative: go to slide 12 when retained earnings are mentioned) EGR 403 - Cal Poly Pomona - SA1

3. What Happens to Net Profit? (cont’d) What can the company do with the remaining $6K? This is “capital allocation” • “Retained Earnings” - invest in facilities & equipment • Retire debt (pay off loans, retire bonds) • Profit sharing, bonuses, indirect benefits • Research & development • Permanent raises or other increased benefits • Help the community (donations, scholarships, etc.) • Buy back stock EGR 403 - Cal Poly Pomona - SA1

4. “The Bottom Line” • Profits were traditionally shown on the books using black ink. A company showing a profit is sometimes said to be “in the black.” • Losses (negative profits) were traditionally shown on the books using red ink. A company showing a loss is sometimes said to be “in the red.” EGR 403 - Cal Poly Pomona - SA1