What is the primary purpose of a Profit and Loss Statement?

Question

BlackTom AI · Accepted Answer

When examining the purpose of a Profit and Loss Statement, it helps to break down what each option claims and see how it aligns with the core function of the P&L.
Option a: 'To show the company's assets and liabilities.' This describes a balance sheet, not a P&L. Assets and liabilities are snapshot items on a balance sheet, whereas a P&L focuses on performance over time. This makes the statement inaccurate as the primary purpose.
Option b: 'To measure the profitability of a business over a specific period.' This captures the essence of the P&L: it summarizes revenues and expenses to determine net income (profit or loss) over a defined timeframe, such as a month, quarter, or year. This is the standard, textbook purpose of the P&L, making it the correct choice.
Option c: 'To detail the company's cash flow.' Detailed cash flow reporting is the function of a cash flow statement, not the P&L. While there can be an indirect impact on cash from profits or losses, the cash flow statement specifically tracks cash receipts and disbursements, so this option misidentifies the primary purpose.
Option d: 'To list the company's equity.' Equity is a component of the balance sheet, representing owner’s claim after liabilities are subtracted from assets. The P&L does not list equity items; it records income and expenses. This option is therefore incorrect.
In summary, the correct interpretation centers on profitability over a period, while the other options describe other financial statements or components that are outside the P&L’s primary goal.

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What is the primary purpose of a Profit and Loss Statement?

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