What can Everton do to improve their financial position? Starter https://www.tutor2u.net/business/reference/introduction-to-the-income-statement What can Everton do to improve their financial position? https://www.tutor2u.net/business/blog/the-business-of-football-everton-explain-where-the-money-goes

Learning Objectives What is an income statement? What is the purpose of an income statement? How is an income statement calculated?

What do we already know? How do we calculate profit? What is profit? How do we calculate profit? Why do we need to calculate net and gross profit? How can a business increase its profit? What may lead to a loss? Why is profit important to businesses?

Income Statement (Or Trading Profit and Loss Account) An account showing the income and expenditure of a company over a period of time

If you want to invest (buy shares) in a PLC such as BP, how would you know if it is a good firm to invest in?

2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit Operating Costs/expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit

Net Profit = Gross profit - Expenses 2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit 79 600 Operating Costs/Expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit Net Profit = Gross profit - Expenses

2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit 79 600 Operating Costs/expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit 38 600

2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit 79 600 104 000 Operating Costs/expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit 38 600

2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit 79 600 104 000 Operating Costs/expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit 38 600 56 400

2008 2007 Turnover 860 000 790 000 Cost of Sales 540 000 470 000 Gross Profit (turnover – cost of sales) 320 000 Operating costs Wages 72 000 68 000 Utilities 40 000 36 000 Miscellaneous 20 000 Total Operating Costs 132 000 124 000 Net Profit 188 000 196 000

2011 (£m) 2010 Turnover 18.2 15.1 Cost of Sales 11.0 Gross Profit (turnover – cost of sales) 5.2 Operating costs Wages 1.1 Utilities 0.4 0.2 Miscellaneous 1.2 0.8 Total Operating Costs Net Profit

2006 2007 Sales 180 000 260 000 Cost of Sales 100 400 156 000 Gross Profit Operating Costs/ expenses Wages 33 200 38 400 Vehicles 7 200 8 400 Other costs 600 800 Net Profit

Profit & Loss Accounts The calculation of profit and loss is one of the most important objectives of accounting and shows how well a business has traded over a particular period of time. Many stakeholders will be interested in this. It shows how much the firm has earned from selling its product or service, and how much it has paid out in costs. The difference between these two is the amount of profit that has been earned. A profit & loss account shows the detail.

Users of Financial Info. Investors Inland Revenue – the tax man! Users of Financial Info. Workers Competitors – all limited companies must publish their accounts Lenders of money e.g. banks

There are 2 parts that we need to focus on: The Trading Account – This calculates the Gross Profit The Profit and Loss account – This Calculates the amount of Net Profit

Mr Reading's Burger Bar – Trading Account    2007 £OOO Sales (Turnover) 300 Cost of Sales Opening Stock 40 Purchases 120 160 Less Closing Stock 30 130 Gross Profit 170 How much stock was left over from last year How much stock was left over from this year (unsold stock)

Mr Reading's Burger Bar plc – profit and loss account Gross Profit   170 Less expenses Wages 50 Insurance 2 Rates 11 Rent 30 Telephone Advertising 4 Depreciation 5 IT 3 Light and heat 118 Net Profit 52 Mr Reading's Burger Bar plc – profit and loss account On some profit and loss accounts this is not listed

Mr Reading's Burger Bar plc   £OOO Sales (Turnover) 300 Cost of Sales Opening Stock 40 Purchases 120 160 Less Closing Stock 30 130 Gross Profit 170 Less expenses Wages 50 Insurance 2 Rates 11 Rent Telephone Advertising 4 Depreciation 5 IT 3 Light and heat 118 Net Profit 52 Trading Account Profit and Loss Account

Key point: This document is prepared once a year Usually it compares the current years figures with last years results Look at the next slide…..

Last years closing stock becomes the new year’s opening stock Mr Reading's Burger Bar   2007 2008 £OOO Sales (Turnover) 300 350 Cost of Sales Opening Stock 40 30 Purchases 120 145 160 175 Less Closing Stock 35 130 140 Gross Profit 170 210 mbnj Less expenses Wages 50 55 Insurance 2 3 Rates 11 12 Rent Telephone Advertising 4 5 Depreciation IT Light and heat 75 8 118 135 Net Profit 52 Last years closing stock becomes the new year’s opening stock

There is one final thing you need to know, although it is unlikely to come up in the exam – The Appropriation Account

Retained profit carried forward 25 28 The Appropriation Account – shows what happens to the net profit. Sole Traders and Partnerships do not have to do an appropriation account.. Net Profit   52 75 Corporation Tax 12 17 Profit After Tax 40 58 Divends paid 15 20 Retained profit carried forward 25 28 Tax paid on profits Total value of dividends paid to share holders Money kept by the business for its own uses

Profit and Loss Account Mr Reading's Burger Bar   2007 2008 £OOO Sales (Turnover) 300 350 Cost of Sales Opening Stock 40 30 Purchases 120 145 160 175 Less Closing Stock 35 130 140 Gross Profit 170 210 mbnj Less expenses Wages 50 55 Insurance 2 3 Rates 11 12 Rent Telephone Advertising 4 5 Depreciation IT Light and heat 75 8 118 135 Net Profit 52 Corporation Tax 17 Profit After Tax 58 Divends paid 15 20 Retained profit carried forward 25 28 Trading Account Profit and Loss Account Appropriation account

Plenary: Why is a profit and loss account important? Who is interested in it? What does it help a business to do? What a the 2 main parts of a pnl account? What information does it contain?