1. Financial Statements – Income Statement
3.5 Assessing competitiveness

2. 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

3. 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

4. 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

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

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

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

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

9. 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

10. 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)

11. 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

12. 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

13. 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 (%)

14. 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

15. 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)

16. 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?