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Income Statements Notes Chapter 21

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65 views5 pages

Income Statements Notes Chapter 21

Uploaded by

tafadzwa mutandiro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Income statements

Profit- is the difference between revenue and total costs


-there are three types of profits
i. Gross profit- is the difference between revenue earned from selling products and
the cost of making those products difference between revenue and cost of sales
ii. Profit/net profit- the difference between the revenue from sales and total costs or
the difference between gross profit and expenses
iii. Retained profit- the owners of a profitable business may decide to reinvest some
of the profits in the business

Profit = revenue - total costs/ gross profit - expenses


Total costs- cost of sales plus expenses
Revenue- the amount earned from the sale of products
Revenue = selling price × quantity sold
Gross profit = revenue - cost of sales
Gross profit - Expenses = Profit or Net profit

Cost of sales- is the cost of purchasing the goods used to make the products sold
Expenses- these are day to day operating e.g rent, advertising costs, electricity costs,
water, repairs, depreciation
Depreciation- is the fall in the value of an asset over time
Importance of profit to private sector businesses
i. measure success of a business
ii. measure performance of managers
iii. decide whether or not to continue making or selling a product
iv. finance the purchase of non-current assets, expand the business
v. attract investors who will provide the additional funds needed to finance business
expansion

Difference between profit and cash


i. money invested in the business or borrowed by a business, increases cash but
does not increase profit
ii. capital expenditure such as buying new machine, decreases cash but does not
decrease profit
iii. sales of goods on credit are recorded in the income statement as soon as the
goods have been sold, this increase cash but does not incease until the customer
pays for the goods
iv. cash pays for the day to day expenses and not profit

Income statements- is a financial statement which records the revenue, costs and
profits of a business for a given period of time. It is produced once a year usually at
the end of the year

Uses of financial statements


Stakeholder Use
Owners/shareholders - profit after tax belongs to the owner/shareholders. They can
see how much they have earned for their investment in the
business
Shareholders - usually the higher the profit the higher the dividend
payment
- the market value of shares will often rise or fall depending
on whether high or low profits earned
Employees - high profit increases job security
- employees might expect to receive a good pay rise if a
business is making good levels of profits
- some businesses have profit sharing schemes, so high profit
means high share of profits
Lenders - they want to be sure that profit is enough to pay interest on
loans
- is the business earning enough profit to be able to repay
loans when due?
Government - the higher the profit, the more tax the government receives
Suppliers - a firm that is profitable will continue to purchase raw
materials and other supplies. This helps suppliers earn profits
Managers - they can compare profit from one year to the next, or with
competitor’s profits, to measure the performance of the
business
The importance of profit to private sector businesses

The usefulness of profit data to stakeholders

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