Financial Statements – Income Statement 3.5 Assessing competitiveness

a) Statement of comprehensive income (profit and loss account): What you need to know a) Statement of comprehensive income (profit and loss account): key information stakeholder interest

Income Statement & Financial Accounts This measures the business' performance (income & costs) over a given period of time, usually one year Balance sheet A snapshot of the business' assets (what it owns or is owed) and its liabilities (what it owes) on a particular day Cash flow statement Shows how the business has generated and disposed of cash and liquid funds during a specific period

What is the Income Statement? A historical record of the trading of a business over a specific period (normally one year) Shows the profit or loss made by the business – which is the difference between the firm’s total income and its total costs Also known as the statement of comprehensive income, or profit and loss account

The Basic Structure of a Simple Income Statement Revenue 100,000

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000)

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000) Gross Profit 60,000

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000) Gross Profit 60,000 Overheads (25,000)

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000) Gross Profit 60,000 Overheads (25,000) Operating Profit 35,000

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000) Gross Profit 60,000 Overheads (25,000) Operating Profit 35,000 Finance Costs (5,000)

The Basic Structure of a Simple Income Statement Revenue 100,000 Cost of Sales (40,000) Gross Profit 60,000 Overheads (25,000) Operating Profit 35,000 Finance Costs (5,000) Profit before Tax 30,000

An Example of a Real Income Statement: Apple Inc. Revenue $233.7bn Cost of Sales $140.1bn Gross Profit $93.6bn Overheads $22.4bn Operating Profit $71.2bn Finance Costs / Income $1.3bn Profit before Tax $72.5bn

Revenue, Cost of Sales & Gross Profit Category Explanation Revenue Revenues (sales) during the period. Sometimes referred to as the “top line” Cost of sales Direct costs of generating revenues go into “cost of sales”. Includes the cost of raw materials, components, goods bought for resale and the direct labour costs of production Gross profit The difference between revenue and cost of sales. A simple but very useful measure of how much profit is generated from every £1 of revenue before overheads and other expenses are taken into account. Is used to calculate the gross profit margin (%)

Overheads and Operating Profit Category Explanation Distribution & administration expenses Operating costs and expenses that are not directly related to producing the goods or services are recorded here Includes distribution costs (e.g. marketing, transport) and the wide range of administrative expenses or overheads that a business incurs Operating profit A key measure of profit. Operating profit records how much profit has been made in total from the trading activities of the business before account is taken of how the business is financed

Net Profit Finance Costs & Income Interest paid on bank and other borrowings, less interest income received on cash balances. A useful figure for shareholders to assess how much profit is being used up by the funding structure of the business Profit before tax Calculated as operating profit less finance expenses Tax An estimate of the amount of corporation tax that is likely to be payable on the recorded profit before tax Profit attributable to shareholders The amount of profit that is left after the tax has been accounted for. Shareholders then decide how much of this is paid out to them in dividends and how much is left in the business (“retained earnings” in the equity section of the balance sheet)

Who is Interested in the Income Statement? Shareholders How much profit is our business making? How much profit can be distributed to us in dividends? Competitors What is the profit (amount) and profitability (% margin)? Is the business more efficient or does it add more value? Government How much tax should this business pay on its profits Employees How secure is the business in terms of profit or loss If bonuses are based on profit, has it been achieved?