1. What can Everton do to improve their financial position?
Starter
What can Everton do to improve their financial position?

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

3. 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?

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

5. 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?

6. 2006
2007
Sales
Cost of Sales
Gross Profit
Operating Costs/expenses
Wages
33 200
38 400
Vehicles
7 200
8 400
Other costs
600
800
Net Profit

7. Net Profit = Gross profit - Expenses
2006
2007
Sales
Cost of Sales
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

8. 2006
2007
Sales
Cost of Sales
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

9. 2006
2007
Sales
Cost of Sales
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

10. 2006
2007
Sales
Cost of Sales
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
56 400

11. 2008
2007
Turnover
Cost of Sales
Gross Profit (turnover – cost of sales)
Operating costs
Wages
72 000
68 000
Utilities
40 000
36 000
Miscellaneous
20 000
Total Operating Costs
Net Profit

12. 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

13. 2006
2007
Sales
Cost of Sales
Gross Profit
Operating Costs/ expenses
Wages
33 200
38 400
Vehicles
7 200
8 400
Other costs
600
800
Net Profit

14. 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.

15. 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

16. 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

17. 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)

18. 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

19. 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

20. 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…..

21. 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

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

23. 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

24. 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

25. 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?