BST Section 5 Chapter 24: Income statements

Accounts

The financial records of a firms transactions

Accountants

Professionally qualified people who are responsible for keeping accurate accounts and preparing final accounts

Final accounts

These are produced at the end of the financial year and give details about the profit/loss made by the business over the year and the worth of the business.

Profit formula

Profit = Sales revenue - Total costs

How is a profit made?

• Increasing revenue by more compared to costs

• Reducing costs for making products

• Increasing revenue while decreasing costs of making products

Importance of profits to private sector

• Reward for enterprise: Entrepreneurs have distinct qualities and profits acts as a reward for these qualities.

• Reward for risk-taking - Shareholders and owners take risks when providing capital to the business receiving profits act as a reward for those risks. Payments act as incentives to invest more and make the business more profitable.

• Source of finance profit acts as a source of finance for the business after payments to owners which can help expand the business.

• Indicator of success: a very successful business shows that investments can be profitable however losses show that investment should not be made. however profit does not equal cash since prfit is made from sales revenue - costs but cash can be derived from various sources.

Importance of profit to the public sector

Acts as a source of finance

Importance of profit to social enterprise

Helps balance profit making with their aims as profit is used for firms survival

Income statement

A financial statement that records a businesses income and all costs incurred to earn that income over a certain amount of time. Used by managers, banks, and investors to see if the business is making a profit.

Main features of an income statement

• Revenue

• Cost of sales

• Gross profit

• Trading account

• Net profit

• Retained profit

Revenue

The income to a business from the sales of goods and services

Revenue = Units sold x Price per unit

Cost of sales

The variable costs of production for a product. Usually cost of materials.

Cost of sales = Opening inventories + purchases - closing inventories

Gross profit

The profit made when revenue is greater than cost of sales. It is profit calculated before fixed costs are considered.

• Does not make any allowance for overhead costs and expenses

Gross profit = Revenue - cost of goods sold

Overhead costs and expenses

The expenses that have to be paid regardless of output even if products made are 0

Trading account

A part of the income statement that shows how gross profit is calculated.

Net profit

It is the profit made by a business after all costs have been deducted from the revenue.

Net profit = Gross profit - overhead costs

Total revenue - cost of goods sold - overhead costs = Net profit

Retained profit

The profit leftover which is reinvested back into the business after all payments have been made such as corporate tax, dividends, payment to owners.

Use of income statements in decision making

• Calculate revenue

• Calculate total costs

• Calculate profit and compare to see which option is better