IB Business and Management

3.5 Final Accounts - Income Statements (Profit and Loss Accounts)

Learning Outcomes

• Explain the purpose of an income statement• Construct and amend accounts from information

given

FINAL ACCOUNTS What does this mean?

What are final accounts?

• The financial statements of an organization made up at the end of an accounting period, usually the fiscal year.

• These accounts report on the company’s performance

Key final accounts:• Income Statement

– Trading account– Profit and Loss Account– Appropriation Account

• Balance SheetWhy do businesses produce final accounts?

Why produce final accounts?

• Legal requirement for incorporated businesses• To calculate tax owed• To aid decision making• As part of a business plan• To gain finance

PROFIT AND LOSS ACCOUNTS (INCOME STATEMENTS)

What is a Profit and Loss Account (Income Statement)

• A Profit and Loss Account is a record of revenues and costs of the business over a period, usually a year

• It also shows:• How much profit/loss was made• How much tax was paid• What happened to the profit

Working out the profitSales Revenue

£1000

Cost of Goods Sold/Cost of Sales

£250

Gross Profit

£750

Expenses

£450 Net Profit

£300

Sales

Gross Profit

Net Profit

Minus: Cost of Sales

Minus: Expenses

Opening Stock +Purchases –Closing Stock

Total of all the Businesses expenses

Task: Calculations• Jeff’s Jukeboxes Ltd has sales of 500 units a month, at

a selling price of £1,000• At the start of the month Jeff had stock of components

values at £20,000. During the month he purchased a further £360,000 of stock. His end of month stock check showed he had £25,000 worth of stock left

• He also has to pay out Rent £2,000, Salaries £9,000, Utilities £500, Business rates £450 and advertising £50

• Calculate his:a. Sales Revenueb. Cost of Goods Soldc. Gross Profitd. Expensese. Net profit

Task: Calculations AnswersSales Revenue = 500 units * £1,000 = £500,000

Cost of Goods Sold = £20,000 + £360,000 - £25,000 = £355,000

Gross Profit = £500,000 - £355,000 = £145,000

Expenses = £2,000 + £9,000 + £500 + £450 + £50 = £12,000

Net Profit = £145,000 - £12,000 = £ 133,000

Trading Account – Shows the Gross Profit

Profit and Loss Account – Shows the Net Profit

Appropriation Account Shows what was done with the profit

Task – Create a Trading and Profit and Loss Account for Jeff’s Juke Boxes

The IB Structure of a P&L Account

Key Formulae

• Cost of Goods Sold = Opening Stock + Cost of Purchases – Closing Stock

• Gross Profit = Sales Revenue – Cost of Goods Sold

• Net Profit = Sales Revenue – Cost of Goods Sold - Expenses

• (Gross Profit – Expenses)

See if you can fill in the missing figures? You must be able to explain how you worked them out

1

3

2

6

5

4

Task

• Answer ALL questions on the question sheet• ‘Analysing Profit and Loss Accounts’

Task – Let’s make it a bit more difficult!

You are going to make some adjustments to a profit and loss accounts

Read through the information on Dalton PlcFor each scenario in Exercise 1 State the effect on:

– Sales Revenue– COGS– Gross Profit– Expenses– Net Profit before interest and tax

Homework Task

• Complete Exercise 4 and 5 on the Dalton Plc

IB Time!!

Time: 13 minutesQuestion: Passionate Pizza