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Income Statements - Coggle Diagram
Income Statements
Main features of an income statement
important financial statements to indicate to managers, owners and other shareholders whether the business makes a profit or loss over (usually) a year.
If the business makes a profit they must ask themselves
is it higher or lower than last year?
if lower, why is profit falling?
is it higher or lower than other similar businesses?
if lower, how to be as profitable as other businesses?
If the business is making a loss they must ask themselves
is this a short or long term problem?
are other similar businesses also making losses?
what decisions can we take to turn losses into profits?
Net profit
GROSS PROFIT - ALL EXPENSES AND OVERHEADS
net profit will also include any non trading income, such as rent from an apartment above a shop
depreciation is the fall in value of a fixed asset overtime
each year, this fall in value is recorded as an expense
Retained profit
this is the profit left/reinvested back into the business after payments have been deducted
This will also contain
corporation tax paid on the company's net profits
dividends paid out to shareholders
retained profits left after these two deductions
results from the previous year to allow easy comparisons
Revenue
amount of money made by the business from the sales of goods and services
PRICE * AMOUNT SOLD
there are many ways to increase revenue, be it
altering the pricing strategy of the product
using different ways of promoting the product
Cost of sales
sometimes known as the cost of goods sold
Includes
cost of the materials used in creating the good
direct labour costs of producing the good
in retail, this could the cost of inventory sold by the shop
excludes fixed costs and sales staff costs
Gross profit
profit calculated before fixed costs are considered
REVENUE - COST OF SALES
Important to note
does not make any allowance for overhead costs of expenses
cost of sales is not the total value of goods bought
this is shown in an income statement by substracting revenue from cost of sales
this is often referred to the trading account
There are other elements to an income statement, such as
other costs of running the business apart form the variable labour and material costs, for example, fixed costs
taxes on profit paid by the company
payment of a share of the profits to owner/shareholders
it is important to note that in a manufacturing business, rather than a retailing one, the labour costs and production costs directly incurred in making the products sold will also be deducted before arriving at the gross profit total
the gross profit is not the final product for the business because all the other expenses have to be deducted
cost must be substracted from gross profit, such as
salaries
lighting
rent of buildings
How a profit is made
profit is an objective for most businesses
REVENUE - COST OF MAKING PRODUCTS
this is supposed to introduce the idea that profit is a surplus remaining after a business cost is subtracted
This surplus can be increase by
increasing revenue by more than costs
reducing the cost of making products
a combination of the below
Importance of profit to private sector businesses
Several reasons
reward for enterprise
those with important qualities and characteristics rewards in profit
reward for risk taking
entrepreneurs and investors can take risks when providing capital to a business; profits reward them for this
payments provide incentives to business owners to make the businesses more profitable
source of finance
profits after payments to owners are a very important source of finance as it allows expansion
indicator of success
when businesses are very profitable, other businesses may be given the signal that investing into this market may be a good idea as well; this also works vice versa
profit is still important for public sector businesses
this might be a target in order to develop or make the business more efficient
social enterprises may also deem profit important
usually may not survive unless a surplus is made
however, profit is not the only objective
these enterprises balance profit making with other aims, such as
protecting the environment
benefiting disadvantages groups in society
Difference between profit and cash
a business records a profit, though it may not immediately mean that they have plenty of cash
in fact, a business may not even have cash at all
Using income statements in decision making
managers can use structure of income statements to help in making decisions based on profit calculations
if a manager has to choose which two products they would need to launch, two income statements could be constructed