Statement of profit/ loss ( income statements) :
- produced for internal use and more frequently because managers need as much financial
information as possible to determine the financial position of the business.
- Less detailed versions are produced externally less frequently as they are also available to
competitors – this provides a more detailed and real insight regarding the business’
strengths and weaknesses.
- Statement of profit or loss (income statement): records the revenue, cost and profit/loss of
a business over a given period of time.
Contents of income statement:
a. Trading account
i. Gross profit ( or loss )
- Not all sales are for cash in most business
- The revenue figure is not the same as cash received by the business.
total revenue = selling price × quantity sold
** revenue is NOT profit **
Profit = cost - revenue
Gross profit = Revenue - cost of sales
Cost of sales = ( opening inventory + purchase ) - closing inventory
b. Profit / loss section
i. Operating profit = gross profit - expenses ( overheads)
- ( Overheads: expenses of a business that are not directly related to the
items being made or sold. Ex: marketing costs, rent and business rates,
depreciation )
ii. Profits before tax: Operating profits - interest costs
iii. Profit of the year: profit before tax - profit ( corporation) tax
c. Appropriation account
- shows how the profit for the year is distributed between owners → in the form of
dividends
Uses of statement of profit/ loss
1. compare actual data with budgeted profit levels of the business. ( variance analysis)
2. bankers and creditors with the info will decide whether to lend money
, 3. Prospective investors will use the info ( profit performance of the business) as a guide to
whether or not they buy shares.
4. measures & compares business performance over time / with other firms along with ratios
to help with analysis
EV: must be aware of the limitations: must consider the quality of the profit recorded. ( low quality
vs high quality profit)
Amending statement of profit / loss:
Rules:
- Use a very specific format of presenting the statement of profit or loss
- If a change to the number of units produced and sold occurs, this is most likely to lead to
changes in both revenue and cost of sales.
- Some overheads might change with a variation in the level of sales. Annual promotion or
transport costs might be affected by variations in the number of units sold.
Format of income statement:
Impact of change on income statement;
, Statement of financial position
- records the liabilities, assets and shareholders equity of a business at one moment in time. (
usually the end of the year)
Sources of shareholders equity:
a. Share capital ( original capital invested in the company through purchase of shares)
B. Retained earnings: accumulated over time through its operations.
Content of statement of financial positions:
Example of a statement of financial position
- produced for internal use and more frequently because managers need as much financial
information as possible to determine the financial position of the business.
- Less detailed versions are produced externally less frequently as they are also available to
competitors – this provides a more detailed and real insight regarding the business’
strengths and weaknesses.
- Statement of profit or loss (income statement): records the revenue, cost and profit/loss of
a business over a given period of time.
Contents of income statement:
a. Trading account
i. Gross profit ( or loss )
- Not all sales are for cash in most business
- The revenue figure is not the same as cash received by the business.
total revenue = selling price × quantity sold
** revenue is NOT profit **
Profit = cost - revenue
Gross profit = Revenue - cost of sales
Cost of sales = ( opening inventory + purchase ) - closing inventory
b. Profit / loss section
i. Operating profit = gross profit - expenses ( overheads)
- ( Overheads: expenses of a business that are not directly related to the
items being made or sold. Ex: marketing costs, rent and business rates,
depreciation )
ii. Profits before tax: Operating profits - interest costs
iii. Profit of the year: profit before tax - profit ( corporation) tax
c. Appropriation account
- shows how the profit for the year is distributed between owners → in the form of
dividends
Uses of statement of profit/ loss
1. compare actual data with budgeted profit levels of the business. ( variance analysis)
2. bankers and creditors with the info will decide whether to lend money
, 3. Prospective investors will use the info ( profit performance of the business) as a guide to
whether or not they buy shares.
4. measures & compares business performance over time / with other firms along with ratios
to help with analysis
EV: must be aware of the limitations: must consider the quality of the profit recorded. ( low quality
vs high quality profit)
Amending statement of profit / loss:
Rules:
- Use a very specific format of presenting the statement of profit or loss
- If a change to the number of units produced and sold occurs, this is most likely to lead to
changes in both revenue and cost of sales.
- Some overheads might change with a variation in the level of sales. Annual promotion or
transport costs might be affected by variations in the number of units sold.
Format of income statement:
Impact of change on income statement;
, Statement of financial position
- records the liabilities, assets and shareholders equity of a business at one moment in time. (
usually the end of the year)
Sources of shareholders equity:
a. Share capital ( original capital invested in the company through purchase of shares)
B. Retained earnings: accumulated over time through its operations.
Content of statement of financial positions:
Example of a statement of financial position
