Assignment 4 due in Friday!! Wednesday Lunchtime support sessions B2.14 You have until 1.30 to work on assignment 4 then no more lesson time available.

LO4: Be able to interpret financial statements Assignment 5

Profit and Loss Account Assignment 5 Key terms A5 Profit and Loss Account Balance Sheets 7 Ratios

Learning Outcomes Describe what a profit and loss account is Identify the elements on a profit and loss account Calculate the sales revenue, cost of sales, gross profit margin and net profit. Explain why it is important for a business to create a profit and loss account.

P5 Interpret the contents of a trading profit and loss account and balance sheet for a selected company.

What is a Profit & Loss Account? Discussion in pairs and group

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Profit and loss accounts A profit and loss account is a financial document created by a business at the end of the financial year. It: Shows whether a business has made a PROFIT or LOSS over a financial year. Describe how the profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs.

Profit and loss accounts It is useful for businesses as it shows them how much profit has been made at the end of the year. Often businesses will use projected profit and loss accounts to help them to plan their finances. This can help with budget setting.

Research Task Research a typical profit and loss account for a business. Identify the different parts of the profit and loss account. Tip: Look for a smaller business.

Main Features of a Profit and loss account explained Sales Revenue The money generated from the sale of goods or services Selling price x quantity sold Cost of Sales Opening stock + purchases – closing stock. Gross Profit Profit before expenses are deducted. Sales revenue – Cost of Sales. Net Profit Net profit is the profit the business has made. Gross Profit – Total Expenses

P&L purpose Sales Revenue   SALES   164000  Opening stock 6,000 Purchases 80000  Closing stock  9000  77000  Gross Profit 87000  EXPENSES Wages 7,000 Rent & Rates 4,800 Telephone 400 Professional Fees 200 Advertising 500 Transport 700 Stationery etc. Insurance Heating & Lighting Bank charges 300 Depreciation 2000 Total Expenses 16,900 NET PROFIT 60100 l The first part of the P&L account works out the gross profit by subtracting the cost of sales which is the amount the business has spent on stock during the year. Cost of sales is subtracted from the sales revenue. Cost of Sales To work out the net profit a business needs to subtract its expenses from its gross profit. Net profit is always lower than gross profit. Tax may be payable on net profit. Expenses

Explain why it is important for a business to construct a profit and loss account. Limited companies need to provide detailed P&L accounts every year. A business can compare their performance between different years. Businesses can keep track of their costs to see if they are rising or failing. Potential investors will want to see how much net and gross profit has been made. If a business wants to get a loan from a bank the bank will expect to see a P&L account.

Chique Ltd activity sheet Complete questions 1 - 3

Create a mind map of profit and loss accounts

Assignment 4 due in Friday!! Homework

Learning Outcomes Questions Describe what a profit and loss account is Identify the elements on a profit and loss account Calculate the sales revenue, cost of sales, gross profit margin and net profit. Explain why it is important for a business to create a profit and loss account.