F4 Income Statements
The income statement (profit and loss account) is a document which includes all of the income and costs related to sales over a period of time.
Revenue is the total money received from selling goods and services during the trading period. This includes money already received and trade receivables at the end of the period (customers who have received goods but not paid their invoice yet). This is calculated using the formula;
Revenue = selling price x quantity sold
Cost of sales (COS) is the cost of the inventory that was sold during a trading period. This is calculated using the formula;
COS = opening inventory + purchases - closing inventory.
Opening inventories are stock that the organisation has at the start of the trading period, carried over from the previous trading period.
Purchases are inventories bought during a trading period
Closing inventories is the amount of unsold stock left at the end of the trading period.
| Income Statement for a Bike Shop for the year ended 31st December 2023 | ||
|---|---|---|
| £ | £ | |
| Sales Revenue | 70,000 | |
| Cost of Sales | 29,000 | |
| Gross profit | 41,000 | |
| Expenses | ||
| Rent | 9,000 | |
| Wages | 13,500 | |
| Insurance | 3,000 | |
| Marketing | 3,000 | 28,500 |
| Profit for the year | 12,500 | |
Gross profit is the money made by a business after subtracting the costs directly related to the manufacture and sale of their goods and services. This is calculated using the formula;
Gross profit = Revenue - cost of sales
Expenses are the indirect costs of operating a business. Otherwise known as overheads, they are costs that are not directly related to the manufacture and sale of goods and services. They include rent, marketing, salaries and wages, research and development, utilities, administration expenses and depreciation.
Trading profit is the profit made from their core operations. This means their revenue minus costs related to the production of their products and services. It is calculated using the formula;
Trading profit = gross profit - expenses
Operating profit is the profit made when returns on investments in other companies are taken into account.
How to Analyse Business Performance Using Income Statements
Comparison with statements from previous years can allow a firm to identify trends and make predictions. E.g. Is revenue increasing or decreasing?
Comparison with statements from rival firms can give an indication of performance compared to competition.
Performance ratios such as gross profit margin, net profit margin and ROCE can be calculated with data from the statement of financial position (these are covered in the next section)
