Learning objectives What is an Income Statement & how is it useful?

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Presentation transcript:

Learning objectives What is an Income Statement & how is it useful?

Income Statement Profit & Loss Account Describes the income and expenditure of a business over a given period of time, usually a year. Shows the profit (or loss) made by the business

Purpose of Income Statement Regular calculations of profit help review progress Shareholders can see if investment is beneficial Is profit being utilised in a sensible way? Is profit of high quality? To satisfy legal requirements (Companies Act) Compare over time & with other firms

Structure Revenue Cost of sales Expenses/overheads Operating profit Finance income Finance costs Profit before tax Taxation Profit for year Earnings per share

Earnings per share Earnings per share = Profit for the period Number of shares

High gross profit Efficient at turning materials into sales revenue High value added Gross profit = revenue – cost of sales Operating profit = gross profit – expenses (+/- exceptional items)

Profit Quality A measure of whether profit is sustainable in the long run High quality profit is profit that will continue Low quality profit arises from exceptional or extraordinary circumstances that are unlikely to continue What is an ‘exceptional item’?

Profit Profit for the year = profit before tax – taxation Profit utilisation: Dividends (every 6 months) Retained profits

Formulae Gross profit = revenue – cost of sales Operating profit = gross profit – expenses +/- exceptional items Profit before tax = operating profit + finance income – finance costs Annual profit = profit before tax – tax Earnings per share = profit for the year number of shares issued

Data is used for … Comparisons Intra-firm (profit centres!) Inter-firm (benchmarking) To a standard (comparing to an industry) Over time (trend analysis)

Financial Data Strengths Weaknesses

Window dressing Manipulating financial accounts to provide a favourable view on the date on which they are prepared Revaluing land & buildings to improve the value of non-current assets Changing depreciation calculations to boost values