Making sense of the…
The Different Types Of Profit
… within the income statement.
Types of Profit
Three Types Of Profit Shown In The Income Statement
There are three types of profit described in the income statement:
1.
Gross Profit
2.
Operating Profit
3.
Profit For The Year
Gross Profit
(or Gross Loss)
Gross Profit
A Definition Of Gross Profit
Gross profit can be defined as….
… the amount remaining (if positive) after the cost of sales
has been deducted from trading revenue.
Gross Profit
The Relationship Between Cost Of Sales and Gross Profit
Revenue
Opening Stock
Plus
Less
Purchases
Cost of Sales
Less
Closing Stock
Equals
Equals
Gross Profit
Cost of Sales
Gross Profit
A Worked Example Of How To Calculate Gross Profit
£
Sales Revenue
Opening Stock
£
5,000,000
500,000
Purchases
2,000,000
Closing Stock
(700,000)
Cost Of Sales
(1,800,000)
Gross Profit
3,200,000
What business insights does
gross profit reveal?
To answer this question, let’s use the income statement for the famous
British fashion brand Burberry PLC.
Gross Profit
Case Study: Burberry Group PLC’s Income Statement
Gross Profit Margin
1,705.5 / 2,633.1 = 0.6477
64%
We can see that Burberry Group PLC goods cost it £927,6 million to make and it
sells it for £2,633.1 million, giving a gross profit margin of 64%
In other words it puts a 289% mark up on its goods over what it costs to produce
Operating Profit
(or Operating Loss)
Operating Profit
A Definition Of An Operating Expense
Operating expense can be defined as….
… expenditures that a business incurs as consequence
of its operating purpose
purpose but not directly associated with
production of
of goods
goods or
or services
services .
the production
Operating Profit
Examples of Operating Expenses
Rent
Advertising
Telephone bill
Staff Salaries
Lighting
Depreciation
Operating Profit
A Definition Of An Operating Profit
Operating profit can be defined as….
… the profit earned from a firm's normal core business
operations.
Operating Profit
An Overview Of How To Calculate Operating Profit
Sales Revenue
Less
(Cost of sale)
Equals
Gross Profit
Less
(Operating expenses)
Equals
Operating Profit
Operating Profit
A Worked Example Of How To Calculate Operating Profit
£
Sales Revenue
Opening Stock
£
5,000,000
500,000
Purchases
2,000,000
Closing Stock
(700,000)
Cost Of Sales
(1,800,000)
Gross Profit
3,200,000
Rent
(1,200,000)
Staff Wages
(800,000)
Depreciation on machine
(200,000)
Total Operating Expenses
(2,200,000)
Operating Profit
1,000,000
What business insights does
operating profit reveal?
So now let's look at Burberry’s operating profit.
Operating Profit
A Worked Example Of How To Calculate Gross Profit
Operating Profit Margin
188.7 / 2,633.1 = 0.6477
7.2%
We can see that while it make a large margin on it products from simply the cost of production,
it occurs further £1,516,8 million to sell its products.
Profit Before Tax
(Loss Before Tax)
Profit Before Tax
A Definition Of A Non-Operating Income
A non-operating income can be defined as….
…financial gains not related to the typical activities of
the business or organisation.
Profit Before Tax
Examples of Non-Operating Incomes
Property Income
Dividend Income
Rental Income
Bank Interest
Currency Exchanges
Sale Of An Asset
Profit Before Tax
A Definition Of An Non-Operating Expense
Non-operating expense can be defined as….
….expenses incurred by a business which are outside
of its main or central operations
Profit Before Tax
Examples of Non-Operating Expenses
Interest expense
Loss on intangibles assets
Loss on sale of buildings
Loss on sale of machinery
Loss on sale of securities
Extraordinary losses
Profit Before Tax
A Definition Of Profit Before Tax
Profit Before Tax can be defined as….
a company's profits before the company has to pay
corporate income tax.
Profit Before Tax
The Income Statement - How It Is Calculated In Fulll
Sales Revenue
Less
(Cost of sale)
Equals
Gross Profit
Less
Equals
Plus
(Operating expenses)
Operating Profit
Non-operating Income
Less (Non-operating Expenses)
Equals
Profit before tax
Profit Before Tax
A Worked Example Of How To Calculate Profit Before Tax
£
Sales Revenue
Opening Stock
£
5,000,000
500,000
Purchases
2,000,000
Closing Stock
(700,000)
Cost Of Sales
(1,800,000)
Gross Profit
3,200,000
Rent
(1,200,000)
Staff Wages
(800,000)
Depreciation on machine
(200,000)
Total Operating Expenses
(2,200,000)
Operating Profit
1,000,000
Rental income (from spare office)
300,000
Bank Interest Expense
(50,000)
250,000
Profit before tax
1,250,000
Profit Before Tax
Case Study: Burberry Group PLC’s Income Statement
Its net non-operating expense
mainly from financing
Profit For The Year
Profit For The Year
A Definition Of Profit For The Year
Profit For The Year can be defined as….
….the net amount earned by a business after all
taxation related expenses have been deducted.
Profit For The Year
A Worked Example Of How To Calculate Profit For The Year
£
Sales Revenue
Opening Stock
£
5,000,000
500,000
Purchases
2,000,000
Closing Stock
(700,000)
Cost Of Sales
(1,800,000)
Gross Profit
3,200,000
Rent
(1,200,000)
Staff Wages
(800,000)
Depreciation on machine
(200,000)
Total Operating Expenses
(2,200,000)
Operating Profit
1,000,000
Rental income (from spare office)
300,000
Bank Interest Expense
(50,000)
250,000
Profit before tax
Corporation Tax
Profit for the Year
1,250,000
(250,000)
1,000,000
Sales Revenue
Less
(Cost of sale)
Equals
Gross Profit
Less
Equals
Plus
(Operating expenses)
Operating Profit
Non-operating Income
Less (Non-operating Expenses)
Equals
Profit before tax
Less
Tax Payable
Equals
Profit For the Year
Let’s play the game again….
Your Task:
Cost Of Sales, Operating Expense,
or Non-Operating Income or Expense?
Stock purchased to be sold
Revenue or Expense? Trading, Operating or Non-operating?
Stock purchased to be sold…
What is it?
Cost of Sales
Depreciation On Delivery Van
Revenue or Expense? Trading, Operating or Non-operating?
Depreciation On Delivery Van
What is it?
Operating Expense
Advertising Costs
Revenue or Expense? Trading, Operating or Non-operating?
Advertising Costs
What is it?
Operating Expense
Interest Paid On A Loan
Revenue or Expense? Trading, Operating or Non-operating?
Interest Paid On A Loan
What is it?
Non-Operating Expense
Rental Income From Property
Revenue or Expense? Trading, Operating or Non-operating?
Rental Income From Property
What is it?
Non-Operating Income
Solicitor Fees
Revenue or Expense? Trading, Operating or Non-operating?
Solicitor Fees
What is it?
Operating Expense
or
Non-Operating Expense