Income Statements Chapter 23

Main Financial Documents What Are Accounts? Accounts are the financial records of a business They are usually consist of: Main Financial Documents The Balance Sheet This tells us how much money is in the business and where it has been spent. The Income Statement This tells us how much profit has been made.

What are Accounts? The information that goes into the accounts is gathered from the following documents: Cheques Order Forms Statements Sales Invoices Delivery Notes Credit Notes

What is an accountant?

Owners or Shareholders Who Uses The Accounts? The type of finance a business will use often depends upon how long they need the money for: Competition Owners or Shareholders The Government Managers Employees Creditors

Calculating Profit and Loss Businesses receive money from selling goods and services. They also have to pay costs in order to make the goods or provide the services Profit can be calculated using the following formula: Profit = Sales Revenue – Total Cost

Defining Profit and Loss If their sales revenue is greater than their costs, then they have made a PROFIT. Revenue > Costs = Profit If their sales revenue is less than their costs, then they have made a LOSS. Revenue < Costs = Loss

Why Produce a Income Statement? It is a legal requirement It summarises all the year’s transactions It shows the financial ‘health’ of the business. Can be used to compare trade this year with trade last year.

Why is profit important? Why Profit is important Page 285 has some - draw a mind map with all the things you also think Profit is important for. 5 minutes

Cash Flow Versus Profit Cash flow and profit are different. Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted. Cash flow is actually more important for the small business owner to focus on than profit. Companies can make a profit but still have a negative cash flow and not be able to pay their bills. Not recognizing this difference is one of the biggest mistakes a small business owner can make. Small business owners need to prepare monthly cash budgets in order to make sure they know their cash flow positions.

How can Profit and Loss be Calculated? Businesses usually calculate their profit or loss at the end of the FINANCIAL YEAR. To calculate profit, a business needs to know the value of SALES, the COST OF SALES and EXPENSES. Sales This is total amount of money a business receives from selling its goods and services. It is sometimes called turnover or total revenue Cost of Sales This is how much it costs to make the goods or provide the services. Eg the amount paid for raw materials Expenses These are the overheads (fixed costs) that have to be paid Rent and Rates Admin Cost Heating and Light Advertising

The Structure of an Income Statement Need to calculate how much it has cost to make the goods that have been sold Income Statement For Lou Pole, year ending 31.08.04 £ £ Sales 400,000 LESS Cost of sales Opening Stock 100 Purchases 100,000 100,100 Less Closing Stock 100 Gross profit 300,000 Business Name and Date Value of stock owned at the start of the year Sales, the money from selling goods Value of raw materials purchased during the year 100,000 Value of stock left at the end of the year. This will be next year’s OPENING STOCK Calculated by subtracting cost of sales from sales

Salaries 75,000 £ £ Gross profit 300,000 LESS Expenses Rent 25,000 Expenses listed and a total given £ £ Gross profit 300,000 LESS Expenses Salaries 75,000 Rent 25,000 Other 14,000 Total expenses Net profit 186,000 114,000 Calculated by subtracting expenses from Gross Profit

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