Welcome to your P&L project for Introduction to Business. If you recall, a P&L (profit and loss) is also called an income statement and is one of the ‘big three’ statements along with statement of cash flows and balance sheet. For this project you will analyze income statements for a single firm over several years in an attempt to analyze the income statement to assess the business in question. Before you bein this project, you may want to refresh your memory on the income statement by watching this video:https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/valuation-and-investing/v/introduction-to-the-income-statement(Links to an external site.)
The income statement (data) that you are to use for this project is available in theannouncementssection via the excel file.
To complete this assignment, you must upload a Word or pdf file to canvas by the due date.
Your word file should answer the following questions:
- What observations can you make about the growth in Gross Profit over the four years?
- With respect to sales, should we be concerned thegrowth in selling and admin expenses?
- To what can we attribute the growth or decline in operating profit?
- To what can what to we attribute the growth or decline in net earningsto what factors would attribute this growth?
- Has advertising been more or less productive between over the four years? Why do you think so?
Please note, you should answer these questions with the mindset of a business owner or adviser... or perhaps as someone who is looking to buy this business.
In question 1,for example,you should not just say that gross profit went up 10% year over year or 25% over 5 years.
What is gross profit? Gross profit is revenue - cost of good sold. So, gross profit can improve due to increasing revenues (p*q) or decreasing costs. Revenue can increase due to increased prices, that is the "q" stays the same but the firm was able to raise prices. Revenue can also improve from selling more units at the same price or even selling more units at lower price. Gross profit can also improve by selling the same amount but with the cost of goods decreasing... and a number of combinations of these examples.
Thus, when asked 'what observations you can make about growth in gross profit you should not only state in raw and % terms what the change was, you should break the sub-components of gross profit down & perhaps hypothesize why you think it happened based on the changes of these sub-components. For example (please note these numbers are purely fictitious and don't actually tie):
"Gross profit grew 10% between years 1-2 and 15% between years 2 and 3, a total of 13% over two years or $1500. Over the three years, revenue, which is price * quantity, grew 20%, or $3000 implying that the firm was able to sell more unit and/or raise prices on existing unit sales. COGS grew 15% over the same period which could be due to increasing costs on a per unit basis (where the firm may have sold the same number of units but it cost the firm more to do so) and/or increased unit sales. Based on the fact that both COGS and revenue grew but that revenue grew more, it is likely that the firm sold more units AND that the firm was able to a) raise prices on existing models or b) sell more upscale models at a higher price relative to cost."
Again, each question should be answered with a similar level of detail - use % change as well as raw change for year-over-year as well as over the three-year period. Break down the sub components, hypothesize what probably happened based on the facts you do have.
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