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.