Income Statements A2 Business Studies. Aims & Objectives Aim: Understand income statements Objectives: Define income statements Explain the components.

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Presentation transcript:

Income Statements A2 Business Studies

Aims & Objectives Aim: Understand income statements Objectives: Define income statements Explain the components of income statements Analyse operating and gross profit margins Evaluate the quality of profits

Standard Life PLC Income Statement 2009/ (£m)2009 (£m) Revenue5452 Gross Profit3235 Operating Profit3.54 Revenue from other Sources 120 Profit for Period15.54 What do you think the financial objectives of Standard Life PLC are? Do you think the performance of Standard Life PLC has improved or deteriorated between ? What do you think the financial objectives of Standard Life PLC are? Do you think the performance of Standard Life PLC has improved or deteriorated between ?

Income Statement Definition: A financial document that summarises a businesses trading activity and expenses to show whether it has made a profit or a loss. Found in the annual report.

Income Statement Definition: A financial document that summarises a businesses trading activity and expenses to show whether it has made a profit or a loss. Found in the annual report.

Income Statement of Ted Baker PLC for the 52 Weeks ending 27 January 2007 £000s Revenue125,648 Cost Of Sales51,986 Gross Profit 73,662 Operating Costs53,612 Operating Profit 20,050 Income Tax Expense5,634 Profit For The Period 14,416 Attributed to Equity Shareholders of Parent Company 14,416

Revenue – Cost of Sales Cost of sales includes direct costs for example raw materials, labour. Gross Profit Profit after all other expenses have been deducted, also referred to as net profit. Indirect costs are deducted eg. Rent Operating Profit (Gross Profit/Sales) X 100 Gross Profit Margins (Operating Profit/Sales) X 100 Gives a clearer indication of the businesses’ control over operating expenses. Operating Profit Margins

Activities: 1)Using the above income statement, calculate the operating profit margin and gross profit margin for Ted Baker Plc. 2)What do these figures show you? 3)How significant do you think the Ted Baker brand name is in achieving the gross profit margin?

Activities: 1)Complete the below Income Statement of Ted Baker PLC for )Calculate the operating profit margin and gross profit margin for Ted Baker Plc. 3)Has Ted Baker become more profitable over time or less profitable? 4)What reasons may there be for this? Between 2007 and 2008 the minimum wage increased in the UK.

Profit Quality Looks at how sustainable profits are. What percentage is from routine day-to-day activity as apposed to non-routine activity (selling off assets).

High Quality Vs Low Quality High Quality Profit which can be repeated Not reliant on one-off profits Shareholders can have some confidence in the profit trend Low Quality Difficult to repeat One-off profits usually caused by sale of assets Shareholders need to adjust reported profit to assess what the likely profit is for next year.

Profit Utilisation How profit is being used. Whether it is being ploughed back into the business or distributed to shareholders.

Plenary Define income statements Explain gross profit margin and operating profit margin. What does profit quality mean? What factors may affect a decreasing Operating Profit Margin over time?