Case study: profit and loss statement by nature and by function (including operating income and cash flow)

Context - L'Atelier du Goût is an artisanal biscuit factory that produces boxes of premium biscuits (shortbread with dried fruit and dark chocolate). The company employs a production team, a small sales force, and an administrative department. You will be responsible for reconstructing the financial statements for the fiscal year, preparing the profit and loss statement in its two formats (by nature and by function), and then analyzing the performance.

1. Determine the quantity of boxes actually sold during the exercise as well as the change in finished goods inventory (in units).

Boxes sold:
units

Change in finished goods inventory:
units

2. Calculate the revenue for the fiscal year. The valuation of the stored production will be addressed in Q5.

Revenue:
€

3. Reconstruct the total amount of raw material purchases for the fiscal year.

Raw material purchases:
€

4. Calculate the change in raw material stock (PCG convention: Beginning stock – Ending stock).

Change in raw material inventory:
€

5. Calculate the total cost price of a box of biscuits by integrating uniquely Production costs: raw materials, production labor, other external production costs, and production depreciation. Deduce the valuation of the stored production.

Unit cost price:
€

Stored production:
€

6. Construct the profit and loss statement by nature by completing the items below.

Production sold:
€

+ Stored production:
€

= Output of the exercise:
€

– Raw material consumption (purchases + change SI–SF):
€

– Other external charges (total):
€

= Added value:
€

– Personnel costs (including all functions):
€

= Gross operating surplus (EBE):
€

– Depreciation allowances (total):
€

= Operating result:
€

– Financial charges:
€

= Current profit before tax:
€

± Non-recurring result (capital gain or loss on disposal):
€

= Result before tax:
€

– Corporate tax:
€

= Net result:
€

7. Calculate the cost of goods sold (CPV) from the unit production cost and the number of boxes sold.

Cost of products sold:
€

8. Calculate the total amount of commercial and administrative expenses (group personnel + other external expenses + depreciation of each function).

Commercial expenses:
€

Administrative fees:
€

9. Build the profit and loss statement by function up to the operating profit.

Revenue:
€

– Cost of products sold:
€

= Gross margin:
€

– Commercial expenses:
€

– Administrative fees:
€

= Operating result:
€

10. Verify that the operating result by function is identical to that obtained by nature. Explain the origin of this equality (hint: consider the role of stored production vs. CPV).

11. Calculate the net book value of the convection oven at the date of disposal, then the capital gain (or loss) realized.

Net book value:
€

Capital gain (or loss) on disposal:
€

12. Calculate the cash flow from operations (CFO) for the year using the additive method (from net income) and then the subtractive method (from EBITDA). Both methods should give the same result.

CAF (additive method: Net income + Allocations – Capital gains on disposal):
€

CAF (subtractive method: EBITDA – Financial expenses – Current corporate income tax):
€

13. Calculate the following ratios and comment on each one in two or three sentences.

Gross margin rate (Gross margin / Revenue):
%

Value added rate (VA / Production):
%

EBITDA margin rate (EBITDA / Revenue):
%

Weight of personnel costs on value added:
%

Net margin rate (Net income / Revenue):
%

14. Summary: What does the presentation by nature teach you that you wouldn't have seen by function (and vice versa)? What managerial benefit does each offer to the leader of L'Atelier du Goût? (4 to 6 lines)

15. Based on the ratios obtained, identify two priority levers for action What would you propose to the manager to improve the future profitability of L'Atelier du Goût? Justify your choice with figures. (5 to 8 lines)

💡 Before we begin — the general logic

The income statement summarizes all the transactions of a year. Two formats exist:

• By nature (French standard PCG): loads are classified according to what they are (materials, personnel, depreciation, etc.). This is useful for understanding the cost structure.
• By function (IFRS standard): expenses are classified according to what are they used for (to produce, sell, manage). This is useful for understanding where value is created or consumed.

Both inevitably give the same net result — it's just two ways of presenting the same figures.

Question 1 — Boxes sold and stock variation

Application :

• Initial stock: 1,800 boxes
• Production: 14,000 boxes
• Final stock: 2,600 boxes

Boxes sold = 1800 + 14000 − 2600 = 13,200 units
Stock change PF = Final stock − Initial stock = 2,600 − 1,800 = +800 units

Note: The change in inventory is positive because the inventory has increased. The company produced more than it sold—the surplus remained in inventory. We'll see right away why this is important.

Question 2 — Revenue

CA = 13,200 boxes × €22 = 290 400 €

Question 3 — Raw material purchases

Step 1: Calculating MP consumption in value

To manufacture one box, the cost consumed is exactly that indicated in the table:

• 0,80 + 1,20 + 0,40 + 1,10 = €3.50 for private messages per box
• For 14,000 boxes produced: 14,000 × 3.50 = 49 000 €

Step 2: Valuation of raw material stocks

Step 3: Calculating purchases

Purchases = 49,000 + (4,085 − 3,350) = 49,000 + 735 = 49 735 €

Question 4 — Change in raw material inventory

Variation = 3350 − 4085 = -€735

Verification : Consumption = Purchases + Change = 49,735 + (-735) = €49,000 ✓ (consistent with step 1 of Q3)

Question 5 — Unit cost price and stockpiled production

Production costs to include:

Unit cost price = €149,350 / 14,000 boxes = €10.668 per box
Stocked production = 800 boxes × €10.668 = 8 534,29 €

Educational note: the 800 boxes in the final stock were indeed manufactured during the fiscal year. If we didn't value them, we would be allocating all production costs to just 13,200 boxes sold—which would underestimate the profit. Stored production is a writing that neutralizes the production costs of unsold boxes.

Question 6 — Construction of the account by nature

Preliminary calculations of loads:

• Total personnel costs: (52,000 + 28,000 + 18,000) × 1.45 = 98,000 × 1.45 = 142 100 €
• Other external charges: 14,000 + 6,200 + 4,800 + 5,500 + 3,500 + 1,200 = 35 200 €
• Depreciation allowances: 4,750 + 3,600 + 2,000 = 10 350 €  (oven 95,000/20 + vehicle 18,000/5 + info 6,000/3)
• Financial charges: 24,000 × 4.5 % = 1 080 €
• Capital gain on disposal: to be calculated in Q11, we take +6 000 € here (see Q11 for details)

Reading GIS: the added value measures the wealth created by the company (production − external consumption).’EBITDA It measures pure operational performance, independently of investment (depreciation) and financing (interest) policies. operating result It incorporates the wear and tear on capital. current result adds the financial dimension. The net result Ultimately, that's what comes down to the company after all.

Question 7 — Cost of Goods Sold (CPV)

CPV = 13,200 × €10.668 = 140 815,71 €

Verification: Total production costs = CPV + Stored production = 140,815.71 + 8,534.29 = €149,350 ✓

Question 8 — Commercial and administrative expenses

Question 9 — Profit and loss statement by function

Question 10 — Reconciliation: why do both give the same result?

We can see it clearly 62 284,29 € in both presentations. Here's why this equality holds mathematically:

💡 The key idea: Stored production and CPV play symmetrical roles. Stored production remove The cost of unsold boxes is not included in the account by nature. The CPV does not retains The account is broken down by function, showing the costs of the boxes sold. The result is the same, but there are two paths.

Question 11 — Capital gain on the sale of the oven

• Acquisition value: €95,000
• Annual allocation: 95,000 / 20 = €4,750/year
• Held for 4 years → accumulated depreciation = 4 × 4,750 = €19,000

VNC = 95,000 − 19,000 = 76 000 €
Capital gain = Selling price − Net book value = 82,000 − 76,000 = +6 000 €

Question 12 — Self-financing capacity

Method 1 — additive (from the net result):

CIF = 43,682.79 + 10,350 − 6,000 = 48 032,79 €

Method 2 — subtractive (from EBITDA):

We start with EBITDA (which already excludes depreciation and amortization) and deduct financial expenses and corporate income tax on current profit. Note: here we are using corporate income tax on profit fluent, not the total IS — because the capital gain (and its IS of 6,000 × 35 % = 2,100 €) are excluded.

Current IS = 61,204.29 × 35 % = €21,421.50
CIF = 72,634.29 − 1,080 − 21,421.50 = 48 032,79 € ✓

The two methods converge, as expected. The cash flow from operations (CFO) of ~€48k represents the cash that the company could theoretically allocate to self-financing (loan repayments, new investments, dividends).

Question 13 — Ratios and comments

Comments:

• Gross margin of 51.5 % : very robust for the food industry (the sector average is around 30-35 %). This is the hallmark of a premium positioning which justifies a high price relative to the cost of materials.
• Value Added Rate of 71.8 % : the company transforms heavily, it depends little on external purchases — consistent with an internalized artisanal production.
• EBITDA margin of 25 % : excellent, a sign of a very profitable operation before investment and financial impacts.
• FP / VA at 66.2 % This is the area to watch. More than two-thirds of the wealth created is absorbed by wages. For a craft business or SME, this is normal (high labor intensity), but it leaves little room for maneuver in the event of a downturn in business.
• Net margin of 15 % : very good level, the activity is profitable and the IS logically weighs on the result.

Question 14 — Nature vs Function: what vision does each bring?

Both presentations yield the same net result, but they tell two different stories:

According to the manager of L'Atelier du Goût: The presentation, by its very nature, allows him to see that the Staff costs amount to €142,100 — the main challenge of his business. The presentation by function allows him to see that the The gross margin is €149,584, that he spends €54,500 in commercial form to generate this margin, and that it can compare this sales/gross margin ratio to that of competitors to judge the effectiveness of its sales force.

Question 15 — Two priority levers

Leverage 1 — Leverage operational efficiency through volume growth

The gross margin per unit is 22 − 10.67 = €11.33 per box. Sales and administrative expenses (€54,500 + €32,800 = €87,300) are largely fixed. Selling 1,000 additional boxes would bring ~€11,300 of additional gross margin without proportionally increasing these costs. Investing in sales (for example, increasing the advertising budget from €5,500 to €12,000) could have a quick ROI.

Lever 2 — Monitor the cost of raw materials, especially butter and chocolate

Of the €3.50 cost of raw materials per box, butter (€1.20) and chocolate (€1.10) represent 66% of the raw material cost, or €32,200 per year. These two ingredients are historically very volatile (world prices). forward purchase policy Multi-year agreements with suppliers would secure the margin. A variation of +10 % on these two items would cost approximately €3,220 — or 7.4 % of the net result.

💡 Summary: The company is healthy (net income/revenue = 15,160), not in difficulty. The levers are aimed at consolidate a profitable position, not a way to turn around a situation. The manager can confidently consider reinvesting the cash flow (~€48k) in business growth.