When discussing the business results shown on a P&L statement, references to “the line” typically refer to the line on the statement showing gross profit. In general, items “above the line” refer to the lines showing total sales (total operating revenue) and cost of goods sold (COGS, or cost of sales [COS]). Items “below the line” typically include operating expenses (including sub-categories), operating income, taxes, interest expenses, net income, earnings per share, dividends, etc.
- Use the example P&L statement provided below to help you answer the following questions:
- Summarize the “above the line” results by describing the relationship between Total Operating Revenues and COGS, and discuss how changes in either or both of these areas influence a company’s Gross Profits.
- Identify the controllable expenses that are “below the line” and define the elements that are included in each expense area.
- Explain the potential influence that internal and external environmental factors may exert on a company’s Net Operating Income.
- Which category of expense has the most influence on Total Operating Expenses in the above example? Why do you think this is so?
- Describe and justify one measure that could be taken to reduce the controllable expenses reflected in the example P&L.
- Compose your answers with a minimum of one paragraph per question (minimum of 5 paragraphs total).
- Research and use at least one additional outside source to support your recommendations