1. IB Business and Management
3.5 Final Accounts - Income Statements (Profit and Loss Accounts)

2. Learning Outcomes Explain the purpose of an income statement
Construct and amend accounts from information given

3. What does this mean?
Final Accounts

4. 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?

5. 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

6. Profit and Loss Accounts (Income Statements)

7. 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

8. Working out the profit Sales Revenue £1000 Gross Profit £750
Cost of Goods Sold/Cost of Sales
£250
Expenses/Overheads
£450
Net Profit
£300

10. Sales Gross Profit Net Profit Minus: Cost of Sales Minus: Expenses
Opening Stock +
Purchases –
Closing Stock
Minus: Cost of Sales
Gross Profit
Total of all the
Businesses
expenses
Minus: Expenses
Net Profit

11. Trading Account – Shows the Gross Profit
Profit and Loss Account – Shows the Net Profit
Appropriation Account Shows what was done with the profit

12. 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:
Sales Revenue
Cost of Goods Sold
Gross Profit
Expenses
Net profit

13. 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

14. 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

15. The IB Structure of a P&L Account

16. 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) t

17. 4 1 2 5 3 6
See if you can fill in the missing figures? You must be able to explain how you worked them out

18. Task Answer ALL questions on the question sheet
‘Analysing Profit and Loss Accounts’

19. 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

20. Homework Task
Complete Exercise 4 and 5 on the Dalton Plc

21. Profit and Loss Account – 2 marks

22. 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 %

23. Mark Scheme – 6 marks for calculations

24. Comment Question

25. Homework:
Have a go at the ‘Corner Store’ Question Time allowed: 10 mins