The top line of the income statement (the famous P & L) dedicates the firm’s ability to create value for its customers, which is its raison d’être.

The bottom line describes what remains to the shareholders after having paid all the stakeholders contributing to the firm’s activity.

The module describes how this bottom line is built from two complementary approaches.

First, the cost approach “by destination” is presented: expenditures are analytically assigned to functions (production, R & D, etc.). In the alternative approach, costs are differentiated “by nature”, according to their impact on cash flow (cash-wages, etc.- vs. non-cash – depreciation).

This leads to presenting the concepts of gross profit, operating profit (EBIT), EBITDA and net income. The result is not a flow of funds, but is the remuneration of the shareholders. The latter must not only be positive, but also exceed the minimum required by investors (see Module 5 on the cost of capital).

Exercise related to the video

Once you’ve watched the video, you can do an exercise to practice what you’ve just learned and assess your understanding of the profit & loss statement.