5.3.3 Income Statements
1
Learning Outcomes
• To understand the main features of an income
statement
• To be able to use simple income statements in
decision making based on profit calculations
The Income Statement
•
•
Shows a firm’s sales revenue and its costs
over a trading period, as well as the
distribution of any profit
An income statement is divided into three
sections:
1. Trading Account
2. Profit and Loss Account
3. Appropriation Account
•
Have a look at Tesco’s (simplified) income
statement…
3
Income Statement of Tesco plc
for the year ended 25 February 2008
£m
Turnover
Less: Cost of Sales
Gross profit
Add: Other income
Less: expenses
Trading Account
£m
47,298
(43,668)
450
(1,277)
Profit and Loss Account
Net profit
Less: Taxation
Profit after tax
Appropriation Account
Dividends paid
Retained profit
(673)
(792)
4
The Income Statement
1. Trading Account
2. Profit and Loss Account
3. Appropriation Account
6
1. The trading account
• Finds the gross profit generated by the business
by comparing sales with the cost of the sales for
the period
• Cost of sales: Stocks. Calculated by taking the
cost of the goods available for sale during the
year and deducting the cost of the goods which
were unsold
Cost of
=
Sales
Opening
Purchases
Closing
+
–
Stock
During year
Stock
• The reason for this calculation is so that sales
and cost of sales compare like with like – i.e. only
the stocks that were actually sold in the year are
counted as costs of sales (making the unrealistic
assumption that stocks bought first are sold first)
7
The trading account of Strachan Ltd
for the year ending 31 December 2006
Opening stock
Sales
Less: Cost of sales
Stock, at 1 January 2006
Add: Purchases of goods
£(‘000)
120
Purchases
Less: Stock held on 31 December 2006
Gross profit
£(‘000)
Closing stock
14
83
97
(10)
(87)
33
8
The trading account
task – Samba Ltd
• Samba Ltd is a medium-sized company selling
ethnic foods to small retailers across the
Midlands
• Identify the relevant information from the table
below and prepare the company’s trading
account for the year ended 31 May 2006
Sales revenue
£1,450,000 Opening stock £34,000
Stock purchases £660,000
Closing stock
£42,000
Wages
£150,000
Distribution
£60,000
Rent and rates
£60,000
Advertising
£30,000
Other expenses
£94,000
Other income
£0
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Profit and Loss Account
1. Trading Account
2. Profit and Loss Account
3. Appropriation Account
2. Profit and loss account
• Shows other items of income earned and
expenditure paid out by the business, in
order to arrive at the net profit
• Other income: Income which is not earned
from the normal trading activities of the
company. e.g.:
– Interest from bank deposits
– Dividends from shares held in other companies
– Rent from property that is let out
• Other expenses: Overheads – Indirect costs
of production such as distribution costs,
advertising, packaging and salaries
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The profit and loss account of Simon and Jasmine Ltd
for the year ending 30 April 2007
£(‘000)
Gross profit
Other income
Rent received
£(‘000)
140
15
155
Less: other expenses:
Rent
Postage
Stationary
Salaries
Depreciation
Delivery costs
Advertising
Net profit
10
3
2
60
15
4
6
Think of five examples
of overheads other
than those shown
(100)
55
13
The Profit and loss account
task – Samba Ltd
• Now prepare Samba Ltd’s profit and loss
account for the year ended 31 May 2006
Sales revenue
£1,450,000 Opening stock
£34,000
Stock purchases
£660,000
Closing stock
£42,000
Wages
£150,000
Distribution
£60,000
Rent and rates
£60,000
Advertising
£30,000
Other expenses
£94,000
Other income
£0
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Trading and Profit and Loss
Account
ICT task
• Create a self-calculating spreadsheet model of Samba
Ltd’s trading and profit and loss account for the year
ended 31 May 2006
• Adjust the model to take account of:
– A 15% rise in sales
– A rise in the price of diesel increasing distribution costs by
10%
– £28,000 of closing stock
Sales revenue
£1,450,000
Opening stock
£34,000
Stock purchases
£660,000
Closing stock
£42,000
Wages
£150,000
Distribution
£60,000
Rent and rates
£60,000
Advertising
£30,000
Other expenses
£94,000
Other income
£0
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Profit and Loss Account
1. Trading Account
2. Profit and Loss Account
3. Appropriation Account
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3. Appropriation account
• Shows how the net profit has been dispersed
• Net profit is used for:
– Corporation Tax (for incorporated businesses)
– Dividends to shareholders - Determined by the
board of directors and approved by the
shareholders at the AGM
– Reinvestment (retained profit)
18
The appropriation account of Matthew and Sarah
Plc
for the year ending 30 June 2007
£(‘000)
Net profit
Corporation tax
Profit after tax
Dividends paid
Retained profit
540
(190)
350
(120)
230
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The appropriation account
task – Samba Ltd
• Continue Samba Ltd from previously:
– Samba pay Corporation Tax at 25% on net profits
– Shareholders accept a dividend costing the firm
£95,000
• Draw up the Appropriation Account for the
company
• How much money is reinvested for next
year?
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The appropriation account of Samba
Ltd
for the year ending 31 May 2006
£
Net profit
404,000
Corporation tax
(101,000)
Profit after tax
Dividends paid
303,000
(95,000)
Retained profit
208,000
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The Income Statement
FitnessFreak Ltd
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Task
• Prepare a full profit and loss account for FitnessFreak Ltd for
the year ending 31 December 2006 from the following
information:
– Last year, FitnessFreak Ltd sold exercise bikes worth a total of
£750,000
– The company paid £70,000 in wages (which it classes as an
overhead) for its shop-floor employees and £35,000 for its
managers, sales staff and administration staff
– A further £475,000 was spent on steel and components, £6,000
was spent on photocopying, stationary, postage etc. and £8,600
on insurance cover
– During the year the interest paid on loans came to £4,800, and
£40,000 was spent on power
– The company estimated the depreciation cost of the machinery
was £8,000
– The tax bill for the year amounted to £22,600
– Directors of FitnessFreak have decided that 30% of the remaining
profit will be distributed to shareholders and that 70% will be
retained as reserves
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