1. Unlocking Financial Accounting Chapter 4 Chapter 4 The income statement Learning summary By the end of this chapter you should know: gross profit equals revenue minus cost of sales cost of sales equals opening inventory plus purchases minus closing inventory net profit/loss equals gross profit minus expenses examples of business expenses include: rent and rates, light and heat, wages and salaries the income statement is a useful document but it has its limitations.

2. Unlocking Financial Accounting Chapter 4 Income statement (IS) – key points Highlights the profitability of the business. Shows the revenue, expenses and profit or loss. Usually prepared for a period of one year. Previously referred to as a profit and loss account. Useful for stakeholders.

3. Unlocking Financial Accounting Chapter 4 Example income statement A. Trader Income statement for the year ended 31 Dec 20X1 £ Revenuexxx Less cost of salesxxx Gross profitxxx Less expensesxxx Net profitxxx

4. Unlocking Financial Accounting Chapter 4 Understanding the terminology Revenue shows the total value of goods or services sold. It may also be referred to as sales or turnover. The cost of sales shows the cost to the business of the goods sold during the period. The expenses are the costs incurred in running the business.

5. Unlocking Financial Accounting Chapter 4 Preparing an income statement A.N. Individual Income statement for the year ended 31 Mar 20X1 ££ RevenueXXX Cost of Sales Opening inventoryXXX PurchasesXXX Less closing inventoryXXX(XXX) Gross profitXXX ExpensesXXX Net profitXXX

6. Unlocking Financial Accounting Chapter 4 Published income statements The detail in the income statement of a limited company is the same as in the income statement of a sole trader. However, the income statement of a company is published in a summarised format. The profit before taxation (in a company income statement) equates to the net profit of a sole trader. The expenses are not listed separately, but are summarised into two categories: distribution costs and administration expenses.

7. Unlocking Financial Accounting Chapter 4 Service organisations Service organisations do not trade by manufacturing or buying and selling but by performing services. Examples of service organisations are accountants, lawyers and gardeners. These organisations do not need to calculate a cost of sales figure as they do not carry any inventory. The income statement shows the income minus the expenses.

8. Unlocking Financial Accounting Chapter 4 Limitations of the income statement Only contains numerical data. Could be dishonestly manipulated. A time period elapses between the accounting period end and the time the information becomes available. In times of inflation the figures are distorted by inflationary rises in prices. Personal opinions and judgements are used in calculating some values.