Cambridge IGCSE Business Studies 5.3 Income statements

5.3.1 What profit is and why it is important

Profit = Sales Revenue – Costs

Profit can be increased by

•  Reducing costs
• Increasing sales revenue (selling more products or increasing the price)

Profit is important to a private sector business because

• it is a Source of finance – Businesses need profit to grow the business
• Reward – Entrepreneurs want their business to profit so they can make money!

Profit is not the same thing as cash! Businesses can have profit but no cash to spend! Refer to 5.2 (Cash flow) 

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5.3.2 Income statements

Income statement (AKA Profit & loss account) – Financial document that shows the company’s revenue and expenses over a period of time. (e.g. 1 year)

Income statement tells the company’s managers whether the company is making a profit or a loss, managers can also compare this year’s income statement with last year to see if the differences in profits or losses. In addition, this can also be compared with other businesses in the same industry.

Income statements containS

•  Revenue (Sellng price x Quantity sold)
• Gross profit (Sales revenue – cost of sales)
• Cost of sales (aka Costs of goods sold) is the cost involved in selling a product – More details here https://www.thebalancesmb.com/how-to-calculate-cost-of-goods-sold-397501
• Net profit (Gross profit – expenses)  | This is the actual profit after subtracting the business’ operating expenses such as employee salaries & wages, taxes etc…
• Retained profit (Profit kept by the business for its own use)

Income statement example 

https://commons.wikimedia.org/wiki/File:Cascadia_Wikimedians_User_Group_-_Income_statement_as_of_Dec_13,_2015.jpg