Income Statements Key Words Gross Profit – difference between sales and cost of sale Profit – difference between revenue from sales and total costs NET PROFIT Retained Profit – re-invest back into the company Total Costs – costs of sales plus expenses Revenue – monies earned from sales Cost of Sales – costs of purchasing goods to make the goods sold Expenses – day to day operating expenses Income Statement – financial statement that records revenue, costs, profit for a time period (6 months, 1 year) IMPORTANT EQUATION! PROFIT = REVENUE – TOTAL COSTS (cost of goods sold + expenses) REVENUE = SELLING PRICE X QUANTITY SOLD GROSS PROFIT = REVENUE – COST OF GOODS SOLD PROFIT = GROSS PROFIT - EXPENSES Example of Income Statement Importance of Profit to Private Sector Businesses • Measure the success of the business • Measure the performance of managers • To continue with the product • Finance new assets, machinery and buildings • Attract new investors Difference from Profit and Cash Money borrowed by the business does not increase profit Buying a new machine decreases cash but does not decrease profit Sale of goods increase profit but not cash (30 days credit to buyers) Income Statements Financial record of business revenue, costs and profit. Once a year. Stakeholder Use Owners / Shareholders Profit after tax, they can see how much they have earned Shareholders Higher the profit the higher the dividend. Share price increase Employees High profit more job security. Profit sharing schemes. Better pay. Lenders Lenders can get their money back. Can they repay the loan Government More profit more tax paid. Suppliers More profit more profitable more purchases from suppliers Managers Compare year on year profits and success of the business.