1. Learning objectives
What is an Income Statement & how is it useful?

2. Income Statement Profit & Loss Account
Describes the income and expenditure of a business over a given period of time, usually a year.
Shows the profit (or loss) made by the business

3. Purpose of Income Statement
Regular calculations of profit help review progress
Shareholders can see if investment is beneficial
Is profit being utilised in a sensible way?
Is profit of high quality?
To satisfy legal requirements (Companies Act)
Compare over time & with other firms

4. Structure Revenue Cost of sales Expenses/overheads Operating profit
Finance income
Finance costs
Profit before tax
Taxation
Profit for year
Earnings per share

5. Earnings per share
Earnings per share = Profit for the period Number of shares

6. High gross profit Efficient at turning materials into sales revenue
High value added
Gross profit = revenue – cost of sales
Operating profit = gross profit – expenses (+/-
exceptional items)

7. Profit Quality
A measure of whether profit is sustainable in the long run
High quality profit is profit that will continue
Low quality profit arises from exceptional or extraordinary circumstances that are unlikely to continue
What is an ‘exceptional item’?

8. Profit
Profit for the year = profit before tax – taxation Profit utilisation: Dividends (every 6 months) Retained profits

9. Formulae Gross profit = revenue – cost of sales
Operating profit = gross profit – expenses +/- exceptional items
Profit before tax = operating profit + finance income – finance costs
Annual profit = profit before tax – tax
Earnings per share = profit for the year
number of shares issued

10. Data is used for … Comparisons Intra-firm (profit centres!)
Inter-firm (benchmarking)
To a standard (comparing to an industry)
Over time (trend analysis)

11. Financial Data
Strengths
Weaknesses

12. Window dressing
Manipulating financial accounts to provide a favourable view on the date on which they are prepared
Revaluing land & buildings to improve the value of non-current assets
Changing depreciation calculations to boost values