IB Business and
Management
3.5 Final Accounts - Income Statements
(Profit and Loss Accounts)
Learning Outcomes
• Explain the purpose of an income statement
• Construct and amend accounts from information
given
What does this mean?
FINAL ACCOUNTS
What are final accounts?
• The financial statements of an organization made up at
the end of an accounting period, usually the fiscal year.
• These accounts report on the company’s performance
Key final accounts:
• Income Statement
– Trading account
– Profit and Loss Account
– Appropriation Account
• Balance Sheet
Why do businesses produce final accounts?
Why produce final accounts?
•
•
•
•
•
Legal requirement for incorporated businesses
To calculate tax owed
To aid decision making
As part of a business plan
To gain finance
PROFIT AND LOSS ACCOUNTS
(INCOME STATEMENTS)
What is a Profit and Loss Account
(Income Statement)
• A Profit and Loss Account is a record of revenues
and costs of the business over a period, usually a
year
• It also shows:
• How much profit/loss was made
• How much tax was paid
• What happened to the profit
Working out the profit
Sales Revenue
Gross Profit
£1000
Cost of
Goods
Sold/Cost of
Sales
£250
£750
Expenses/
Overheads Net Profit
£450
£300
Sales
Minus: Cost of Sales
Opening Stock +
Purchases –
Closing Stock
Gross Profit
Minus: Expenses
Net Profit
Total of all the
Businesses
expenses
Trading Account –
Shows the Gross Profit
Profit and Loss Account –
Shows the Net Profit
Appropriation Account
Shows what was done with
the profit
Task: Calculations
• Jeff’s Jukeboxes Ltd has sales of 500 units a month, at a
selling price of £1,000
• At the start of the month Jeff had stock of components
valued at £20,000. During the month he purchased a
further £360,000 of stock. His end of month stock check
showed he had £25,000 worth of stock left
• He also has to pay out Rent £2,000, Salaries £9,000,
Utilities £500, Business rates £450 and advertising £50
• Calculate his:
a. Sales Revenue
b. Cost of Goods Sold
c. Gross Profit
d. Expenses
e. Net profit
Task: Calculations Answers
Sales Revenue = 500 units * £1,000 = £500,000
Cost of Goods Sold = £20,000 + £360,000 £25,000 = £355,000
Gross Profit = £500,000 - £355,000 = £145,000
Expenses = £2,000 + £9,000 + £500 + £450 +
£50 = £12,000
Net Profit = £145,000 - £12,000 = £ 133,000
Task – Create a Trading
and Profit and Loss
Account for Jeff’s Juke
Boxes
Additional Info:
• Your calculations are
for February 2014
• Tax rate is 25%
• Jeff keeps 100% of
profits within in the
business as retained
profit
The IB Structure of a P&L
Account
Key Formulae
• Cost of Goods Sold = Opening Stock +
Cost of Purchases – Closing Stock
• Gross Profit = Sales Revenue – Cost of
Goods Sold
• Net Profit = Sales Revenue – Cost of
Goods Sold - Expenses
• (Gross Profit – Expenses)
4
1
2
3
5
6
See if you can fill in the missing figures? You must
be able to explain how you worked them out
Task
• Answer ALL questions on the question sheet
• ‘Analysing Profit and Loss Accounts’
Task – Let’s make it a bit more
difficult!
You are going to make some adjustments to a profit and
loss accounts
Read through the information
on Dalton Plc
For each scenario in Exercise 1
State the effect on:
– Sales Revenue
– COGS
– Gross Profit
– Expenses
– Net Profit before interest and tax
Homework Task
• Complete Exercise 4 and 5 on the Dalton Plc
Profit and Loss Account – 2
marks
IB Time!!
Time: 13 minutes
Question: Passionate Pizza
Extra information you will need
(given that you haven’t covered
elasticity yet):
- The price reduction will lead to
a 5% increase in demand
- A % increase in advertising
expenditure will result in
demand increasing by the
same %
Mark Scheme – 6 marks for
calculations
Comment Question
Homework:
Have a go at the ‘Corner Store’ Question
Time allowed: 10 mins