Profit/Loss Statements

Exam prep

What is a profit loss statement?

• Also called an income statement

• Financial report

• Provides summary of financial performance over a specific period

• Summarises total revenue/expenses during the period

What does a P/L Statement reflect?

• How business performed financially during specific time period

What does a positive net worth indicate?

• Business is earning more than it spends

What does a net loss indicate?

• Business is spending more than they are earning

• Expenses incurred exceed income

What are key components of a P/L Statement?

• Revenue

• COGS

• Gross Profit

• Other Income

• Total revenue

• Expenses

• Net profit

What is the importance of a P/L Statement?

• Crucial for businesses to stay in control of their finances

• Allows for comparing actual results to forecasts and budgets

What does a P/L Statement help a business do?

• Make informed decisions

• Understand profitability

• monitoring performance

What P/L Statement identify?

• issues

• supports external obligations

• supports tax preparation

What are COGS?

• Costs of Goods Sold

• Total direct cost incurred in purchasing/producing goods sold by a business

What is included in COGS?

• All costs necessary to bring inventory to present location

• All costs relating to condition of sale

What is the purpose of COGS?

• Helps business evaluate profitability

• Assesses direct costs tied to inventory

What does reviewing COGS do?

• Helps identify root of issues when a business is underperforming

What costs are included in COGS?

• Purchase cost of goods/raw materials

• Direct labour from workers making the products

• Direct material used in production process

• Factory overheads associate with production

• Essential packaging needed to sell the product

• Inbound freight/shipping costs necessary to bring goods to the business

• Insurance on shipping to protect goods during transport

• Import duties imposed by government on goods brought in from overseas

• Storage/handling when moving goods after shipping

How is Gross Profit calculated?

Revenue - Cogs = Gross Profit

What business types include COGS?

• Goods based businesses - sale of physical goods

• Retail businesses - stock associated freight charges

• Manufactory businesses - raw parts/materials and direct labour

• G + S Sales - included in P/L statement, deducted from goods/sales revenue

What businesses exclude COGS?

• Solely service oriented businesses

How is net profit calculated?

Total Revenue - Total Expenses = Net Profit

What is revenue?

• Core earnings from primary business operations - selling goods/services

• Sales, fees, service revenue

• Used to calculate gross profit

What is Other Income?

• Activities outside of core operations of the business

• Additional/secondary earnings

• Bank interest, dividends, grants, subsidies

How is Total Revenue calculated?

Gross Profit + Other Income = Total Revenue