Question

The profit and loss statement is undoubtedly the most recognized tool of financial statements and activity-based reporting However, it tells little, if anything, of performance on the "shop floor. Why is knowledge at both 30,000 ft and on the ground critical for financial success?

Answer 1

Answer

• Profit and Loss Statement is indeed the most recognised tool of financial statement.
• It tells what are the revenues that has been earned by the company, and what were its expenses for a period of time.
  It also discloses the net result of revenues and expenses, being Net Income or Net Loss.
• However, knowledge at both 30000 ft and on the ground critical for financial success because there can be a situation where the overall profit and loss statement might be showing a Net Income, but one of them (ground level and 30000 ft) might be unprofitable.
• Consider the following case:
  Condensed total of profit and loss statement of a company is provided below:

	TOTAL
Revenues	$200,000
Expenses:
Rent	$50,000
Other expenses	$10,000
Total expenses	$60,000
Net Income	$140,000

Notice that the statement shows a favourable results, with 70% Net Income.
Suppose the detailed statement is presented:

	TOTAL	Ground level	30000 ft
Revenues	$200,000	$160,000	$40,000
Expenses:
Rent [allocated on the basis of revenue]	$50,000	$40,000	$10,000
Other expenses [allocated equally]	$10,000	$5,000	$5,000
Total expenses	$60,000	$45,000	$15,000
Net Income	$140,000	$115,000	$25,000

--That is why knowledge at both level is required, because the overall the company is doing good, but mostly because of “Ground Level” performance.