INCOME STATEMENTS

Chapter 24
What are accounts and why they are necessary?
• The financial records of a business are called accounts
• Record the main financial results over the year and the
current worth or value of the business
How a profit is made
• Profit = Revenue – Cost of making products
• If surplus and profit,
• Increasing revenue by more than costs
• Reducing the cost of making products
• Combining two benefits
Main features of income statement
• Show account users whether profit or loss
• If profit,
• Higher or lower than last year
• Why profit is falling?
• Compare with similar business
• If loss,
• What decisions can we take to turn losses into profits?
Revenue
• Amount made by the business from the sales of its goods
and services
• If the price $10 and 1000 products are sold, then revenue
is $10000
Cost of sales
• Cost of goods sold
• Variable cost of production
• Cost of materials
• Direct labour costs
• Cost of inventory sold
• But, excludes, fixed cost expenses such as distribution
costs and sales staff costs
Gross profit
• Gross profit = Revenue – cost of sale
• GP does not make any allowance for overhead cost or
expenses
• Cost of sales is not the same as total value of goods
bought by the business
Trading account
• Trading account shows how the gross profit of a business
is calculated
• Following items are missing in trading account
• Other costs of running business
• Taxes on profit
• Payment to shareholders
Net Profit
• Net profit is the profit made by a business after all costs
have been deducted from revenue
• It is calculated by subtractive overhead costs from gross
profits
Depreciation

• Depreciation is the fall in the value of a fixed

asset over time

• For example, new truck bought by a building firm

fall in value with age and use

• This fall in value is taken as expenses

Retained profit
• Retained profits is the profit left, or reinvested back into
the business, after all payments have been deducted
• Income statement for limited companies contain
• Corporation tax paid on the company net profit
• Dividends paid out to shareholders
• Retained profits left after these two deductions
• Result form the previous year to allow for easy
comparison
Using income statements and decision making

• Make decision based on profits calculation

• If manager has to choose between two new products to

launch, one way of making decisions is to constructed two

forecasted income statements