23 Income statements

Revision answers
1 i) To help them calculate the profits or losses of the business.
ii) To help make decisions such as closing a factory or division of the business or
expanding the business.
Other answers possible
2 i) Shareholders: could dividends be increased?
ii) Bank: is the company solvent and liquid?
iii) Workers: are our jobs likely to be secure?
3 Net profit = gross profit less expenses (or overheads).
4 The value of goods sold. This is sales revenue.
The costs of the company divided between ‘cost of goods sold’ and overhead
expenses.
The resulting profit or loss once costs are subtracted from revenue.
5 i) To reward the owners for the risks they have taken.
ii) To provide internal finance for further expansion.
6 Profit is not the same as cash-flow! There are several reasons why cash-flow is
negative even though profits are being made. Sanjay might have given credit to
his customers; he might have had to repay a loan; he might be expanding his
business so new equipment or premises might have been purchased; he might
have held higher inventories, tying up more cash in the process.
7 Sales revenue is the value of all goods sold during the period covered by the
income statement. In simple terms it can be calculated by:
selling price per unit × number of units sold.
Cost of sales is the total cost of the goods sold during the income statement
period; for example the cost of bought-in materials and the other factors of
production used to make them into saleable goods.
8 Net profit is calculated by subtracting all costs from sales revenue but before
any deductions of dividends. Retained profit is net profit after the deduction of
dividends paid to shareholders.
9 a) l A: $20 000 − $10 000 = GP $10 000
l B: $24 000 − $12 000 = GP $12 000
b) l A: $10 000 − $5000 = NP $5000
l B: $12 000 − $8000 = NP $4000
10 Gross profit less expenses = net profit. If expenses (overheads) are larger than
gross profit then a net loss will be made.

Answers to activities
Activity 23.1
a) $10 000
b) $25 000
c) $16 000

Activity 23.2
a) $1500
b) $9000
c) $60 000
d) $75 000

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 23 Income statements

Activity 23.3
b) $11 000
c) $1000
d) $60 000

Activity 23.4
a) $70 000
b) Retained profit increases the internal finance for the business. This can be used
for expansion and will avoid the use of long-term loans, which carry an interest
cost.

Activity 23.5
Yes: higher profit; rent is fixed for five years not two; increased housing should lead
to more customers but a competitor has just closed a shop near Also this could mean
more customers for this location.

Activity 23.6
b) and c)
Pizza: sales revenue $150 000; cost of goods sold $50 000; gross profit
$100 000; net profit $59 000.
Curry: sales revenue $200 000; cost of goods sold £80 000; gross profit
$120 000; net profit $73 000.
d) Three other factors: number of local competitors for each option; can the new
equipment be used for anything else?; are the suppliers for both options as
reliable as each other?
e) How to increase profit: new sizes of pizza; better or increased advertising, as
long as sales increase by more than advertising costs; new pizza ingredients;
higher prices to increase margins, but how much will demand fall by? Lower
prices to increase sales, but will the lower margins lead to lower total profits?
Action taken may depend on the degree of local competition.

Sample answers to Paper 1 style questions

(with mark annotations for Question 2)
1 a) The total value of goods sold = selling price per unit × number of units sold.
b) Last year’s revenue = $50 000. Add 10 per cent by multiplying by 1.1.
Revenue this year = $55 000.
c) i) Rent for his hair salon.
ii) Advertising his hairdressing service.
iii) Fixed electricity charges.
iv) His own salary.
d) Net profit = gross profit less expenses
Number of customers served this year = $55 000/$5 = 11 000
Gross profit = $55 000 – (11 000 × $2)
$55 000 − $22 000 = $33 000
Net profit = $33 000 − $10 000 = $23 000
e) Yes: it will lead to higher profit (margin) on each item sold and if he sells the
same amount then this will increase profits.
No: sales are likely to fall (depends on elasticity of demand) and profits could
fall.
Overall conclusion/judgement needed. It might depend on whether
competitors are increasing prices too.

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 2
 23 Income statements

2 a) The cost of the materials and other variable costs needed to produce the
product/service OR opening inventories (stocks) + purchases less closing
inventories (stocks). [2K]
b) i) Tax (profits tax or corporation tax) has to be paid to the government on
net profit.
ii) Dividends might be paid to shareholders of a company. [2K]
c) i) Sue could reduce the price of the game and this should attract new
consumers to buy this game rather than competitors’ games. [1K; 1App]
ii) Sue could spend more on advertising, e.g. online promotions, as potential
consumers of computer games might be unaware of her games.
[1K; 1App]
d) i) Competitors’ games: in which market segment are there more
competitors? More rival games might mean that Sue has to offer her game
at a lower price. [1K; 1App; 1An]
ii) Total market segment size: Sue might decide to launch the game that
appeals to a bigger market segment to give her more potential sales if the
game is successful. [1K; 1App; 1An]
e)
Forecasts for next year Game A Game B
Sales revenue 3000 units @$5 2000 units @$10
Cost of sales $1.50 per unit $3 per unit
Expenses $4000 $9000
Forecast annual profit $15 000 − [$4500 + $4000] = $20 000 − [$6000 +
$6500 $9000] = $5000

Higher forecast profit from Game A so on the basis of profit forecast alone
then A should be chosen.
Other factors might be important too such as how accurate the market
research was and how many competitors there are in each market segment.
Student’s overall conclusion.
[1K; 1App; 2An] + [2Eval]

Answers to revision test

1 2)
2 3)
3 2)
4 4)
5 1)
6 4)
7 3)
8 2)
9 2)
10 4)

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 3