JEL classification: M21,M41. Key words: revenues, expenses, revenues structure, efficiency expenses rate, performance

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1 THE ANALYSIS OF REVENUES AND EXPENSES BASED ON PROFIT AND LOSS ACCOUNT Lect. Mirela Monea, Ph. D University of Petrosani Faculty of Science Petrosani, Romania Abstract: The profit and loss account summarizes all revenues earned and expenses of an accounting period and reports the results. The paper presents the most important aspects, into a synthetically manner, regarding the company expenses analysis. Because of the complexity of this topic, the aims of the present paper are to discuss the general aspects of the expenses analysis and methods used in the expenses analysis. Theoretical background is completed by a suggestive case study, moreover which reveal the importance of this type of analysis on performances indicators. The importance of the indicators is dependent on their informational value, and capacity to characterize the content and evolution of the economic activity of the company. JEL classification: M21,M41 Key words: revenues, expenses, revenues structure, efficiency expenses rate, performance 1. INTRODUCTION Balance sheet, though it shows the size of global result, it doesn t explain his origin or causes that have generated him. The balance sheet is only one of the financial statement and provides information about assets, liabilities, equity, liquidity, solvency, risk, financial flexibility. For expressing the result structure and conclusions regarding the performance of enterprise activity is using the profit and loss account, called also statement of income. The profit and loss account provides information about revenues, expenses, operational result and also gains and losses from other activities. In the multistep, profit and loss account are revealed four measures of profitability: gross profit, operating profit, pretax income and after tax net income. The information reflected in the profit and loss account, are grouped according to the nature of the activities of the economic entity, in a given reporting period (financial exercise). Are considered current operations (operating) those operations which contribute to the realization of main object of activity of the company, a repetitive and habitual ones. Alongside and in support of current operations, the operator develops a financial activity but also extraordinary activities (Petrescu, 2010). The objectives pursued through the analysis of profit and loss account are mainly (Bătrancea, 2004): - profit and loss account gives an overview on revenues and expenses that contribute to the achievement of results; - reflecting the company's absolute financial performance from the perspective of volume of activity. 14

2 - appreciation of the level of achievement of financial results and identifying the factors that influenced this level; - developing the ability to build and implement the models of structural and factorial analysis of income, expenses and results; - assessing the effects induced by changing the level of volume indicators on the level and dynamics of other economic and financial indicators. To understand the profit and loss account we must understand revenues and expenses recognition. Revenue is recognized when is realized and earned. During a specific period of time revenues represents the total amount earned by selling company's products or by providing its services. Expenses represent in a specific period of time the costs, including the cost of materials, labor, supplies, utilities, leases. Expenses must to generate revenues for the company (Griffin, 2009). 2. DYNAMICS AND STRUCTURE OF EXPENSES AND RENENUES In Table 1 is presented the dynamics and structure of total expenses of a compay (S.C. Alfa) Table no. 1. Dynamics and structure of total expenses No Nature of activity N-2 N-1 N 1 Total expenses: Operating expenses Financial expenses Extraordinary expenses 5 The index of total 6 The index of operating 7 The index of financial 8 The index of extraordinary Dynamics of total expenses % 109,90 178,57 100% 110,01 179,52 100% 96,03 57,23 Structure of total Total expenses: Operating expenses 99,22 99,32 99,75 11 Financial expenses 0,78 0,68 0,25 12 Extraordinary expenses 0,00 0,00 0,00 In the period under review, total expenses registered a substantial growth, in the second year increased by 9,90%, than in the first year, but in the third year growth is very high compared to the beginning of the period, meaning 78,57%. 15

3 In structure, the largest share in total expenses is held by the operating expenses (over 90% in all the three periods analyzed), and the share of financial expenses in total expenses is very small (less than 1%), and decrease continuously during the three years analyzed respectively from 0,68% in the second year, at 0,25% in the third year. There aren t extraordinary expenses. Analyzing the data presented in Table 1. we observed that the growth rate of operating expenses is close to the total expenses, in the third year increased both with over 70%, compared to the beginning of the period analyzed. The dynamics and structure of total revenues of the company Alfa is presented in Table no.2. Table no. 2. Dynamics and structure of total revenues No Nature of activity N-2 N-1 N 1 Total revenues: Operating revenues Financial revenues Extraordinary revenues The index of total revenues (%) 6 The index of operating revenues (%) 7 The index of financial revenues Dynamics of total revenues 100% 108,12 191,49 100% 108,07 191,29 100% 116,09 229,48 8 The index of extraordinary revenues (%) Structure of total revenues 9 Total revenues: 100,00 100,00 100,00 10 Operating revenues 99,48 99,44 99,37 11 Financial revenues 0,52 0,56 0,63 12 Extraordinary revenues Total revenue, in the analyzed period, also recorded an increasing trend, but a good thing, in a higher rate than expenditure, which positively influences the evolution of the result. So, total revenues increased by 8,12%, than in the first year, but in the third year growth is very high, meaning 91,49%. Just as in the case of expenses, in structure, the largest share in total revenues is held by the operating revenues, and the growth rate of operating revenues is close to the total revenues, in the third year increased both with over 90%, compared to the beginning of the period analyzed. The share of financial revenues in total revenues is very small, but increase continuously during the three years analyzed respectively from 0,56% in the second year, at 0,63% in the third year. There aren t extraordinary expenses. 16

4 n-2 n-1 n total renenues total expenses Figure no.1. The evolution of total revenues and total expenses n-2 n-1 n n-2 n-1 n Operating expenses Operating revenues Financial expenses Financial r evenues Figure 2 The evolution of operating expenses and operating renenues Figure 3 The evolution of financial expenses and financial revenues 3. ANALYSIS OF EXPENDITURE EFFICIENCY Dynamic, structural and factorial analysis of the expenses on the income is to highlight the trends, factors influencing their level and to identify reserves that can be valued for their reduction or maintenance, which contribute to the economic and financial performance of the entity (Valceanu, 2005). Generally, it can make a correlation between income and expenses, in the sense that the realization of income requires an expense or vice versa. But there are exceptions. So for example the financial expenses usually do not generate revenues, and achieve them with no cost. The same rules they have some extraordinary expenses and income. To assess the effectiveness of the expenses incurred by an enterprise is necessary to calculate the total expenses to 1000RON total revenues of the company. This indicator called efficiency ratio of total expenses is calculated by dividing total expenses at total revenue and multiplied by 1000: E Eo + E f + E t ex Et / 1000R = 1000 = 1000, t R R + R + R t o f ex 17

5 where: E t, Eo, Ef, Eex total, operating, financial, extraordinary expenses Ro, Re, Rf, Rex total, operating, financial,extraordinary revenues Rt / expenses at1000 monetary units total revenues R t Table no. 3 Expenses efficiency ratio Activity Expenses efficiency ratio N-2 N-1 N Operational 964,83 982,08 905,47 Financial 1437, ,15 358,50 Extraordinary Total 967,30 983,24 902,04 During the period analyzed we observed the trends in expenses efficiency ratio which reveals a favorable situation for company Alfa. After an increasing of the expenses at 1000 monetary units revenues in N-1 period in comparison with N-2 period (both total and operational), we observed a decreasing value from 967,30 monetary units to 902,04 monetary units revealing the increased efficiency of the total expenses in the period N (the same situation it is recorded for the operational expenses - the ratio in the period N has a value of 905,47 monetary units from 964,83 in N-2 and 982,08 in N-1). The ratio is influenced by the changes on revenue structure and operational expenses efficiency ratio, which represents the main influence factors on that value. Expenses efficiency has a major contribution to the evolution of the results (operating profit, gross profit and also net profit) in that period. The profit and loss account is useful to determine enterprise's net profit or loss (difference between revenue and expenses) taking into consideration different levels corresponding to the activity types, operational, financial and extraordinary. Table no. 4 Expenses, revenues and results No. Revenues N-2 N-1 N Expenses Results 1. Operating revenues Operating expenses Operating result (1-2) Financial revenues Financial expenses Financial result (4-5) Current result (3+6) Extraordinary revenues Extraordinary expenses Extraordinary result Total revenues (1+4+8) Total expenses (2+5+9) The gross result (11-12) Profit tax Net result

6 4. CONCLUSIONS The profit and loss account summarizes all revenues earned and expenses of an accounting period and reports the results. Based on information provided by the Profit and Loss Account, the financial analysis of the performances is deepened on four levels, namely: operational level, financial level, the extraordinary, the global level. The operational level - emphasis the volume of the main activity (basic) using a system of indicators determinate based on Profit and Loss Account. On financial level is point out the financial flows. The extraordinary level emphasis by its specific indicators, financial flows from extraordinary operations. The global level of activity provides, using a system of indicators, intermediate and final results of activity; emphasis global result and forming an overall assessment on the financial performance of the reporting period; provide opportunities for sum up all items of revenues and expenses that have contributed to the result and to identify factors (favorable or unfavorable) which have influence him. REFERENCES 1. Bătrâncea, M. Analiza financiară a întreprinderii, Editura Risoprint, Cluj Napoca, Buglea, A. Analiza economico-financiara, Editura Universității de Vest, Timisoara, Buse, L Analiza economico-financiară, Editura Sitech, Craiova, 2010 Siminică, M Simion, D. 4. Griffin, M.P.. MBA Fundamentals. Accounting and Finance, Kaplan Publishing, New York, Helfert, E. Tehnici de analiza financira, BMT Publishing House, Bucuresti, Niculescu M. Diagnostic financiar, Editura Economică, Bucureşti, Pavaloaia, W. Analiza financiara. Studii de caz, Editura Tehnopress, Iași, 2006 Paraschivescu, M.D, Olaru, G. 8. Petrescu, S. Analiza si diagnostic financiar-contabil, Editura CECCAR, Bucuresti, Stefea, P. Analiza rezultatelor intreprinderii, Editura Mirton, Timisoara, Valceanu, Gh., Analiza economico-financiara, Editura Economica, Bucuresti, 2005 Robu, V., Georgescu, 19