Business Paper 1 - Income Statement (121) + Ratio Analysis (122)

Income Statement

shows the business’s financial performance over a given period of time e.g a. year - it shows the gross profit and net profit

Gross Profit

calculates a company’s revenue minus its cost of goods sold (direct costs)

Cost of Sales

the direct costs (variable costs) related to the supply of a product/service

Net Profit

measures the revenue minus all of the expenses

formula: gross profit - expenses

Ways to improve Gross Profit and Net Profit

Gross Profit:

• increase selling price

• decrease cost of sales

Net Profit:

• increase gross profit

• decrease overhead expenses

Gross Profit Margin (Formula + Analysis)

formula: gross profit/revenue x 100

it shows how well a business controls its production costs e.g. raw materials

it is an indicator of how efficient the business is at making and selling its product

GPM depends on…

size of the business:

• a large supermarket would have a low gpm because it can spread expenses over a large number of sales

• a corner shop would have a high gpm because they have high expenses in relation to sales and those have to be covered by a high gpm

Net Profit Margin (Formula + Analysis)

formula: net profit/revenue x 100

it shows how efficiently a business controls its expenses

it shows well a business manages its expenses

a business with a high gpm often has higher expenses and vice versa

a new business will have a low npm as they try to establish themselves e.g more money spent on advertising but this might not indicate problems

18% may be regarded as good

>10% may be regarded as poor (improvements on costs and expenses)