1 Calculating the profit or loss of a business

* Profit (what it is and why it matters) * Purpose and main elements of profit/ loss account All students…. Explain the concept of profit. Understand the main elements of a profit/loss account statement. Higher level thinking…. Show understanding of why profit matters to a private sector business. Show awareness of the distinction between retained and distributed profit Distinguish between cash and profit. Show awareness of why cash and profit differ. 2

3 Types of financial analysis Many types of financial reports are concerned with planning ahead. These include cashflow forecasting, break-even analysis and budget setting. Others are concerned with reporting results at the end of the year. These include the profit and loss account and the balance sheet.

4 The purpose of a profit and loss account It summarises all the sales revenue for the financial year. It summarises all the payments or expenses for the same year. The difference between the two totals is the profit or loss made in that year.

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6 Two Types of Profit Gross Profit Net Profit Formula: Sales revenue – Cost of Sales = Gross Profit Gross Profit – Expenses = Net Profit

7 Stages: Sales Revenue Sales are the amount of Money received by selling goods If you sold 500 pairs of shoes at $100 each then the value of your sales revenue would be…. $50,000

8 Stages; Cost of Sales Expenditure which is made specifically to produce or sell the item. Purchases (raw material and Stock) Assume each shoe cost $50 to buy from the manufacturer 500 x $50 = $25,000

9 Stage: Gross Profit Profit from the sales Sales revenue – Cost of Sales $50,000 - $25,000 = $25,000

10 Stage: Expenses Cost of running the business You operating costs/ Fixed costs/ Overheads Rent/ wages/ utilities = $8,000

11 Stage: Net Profit Deducating your expenses from your gross Profit $25,000 - $8,000 = $17,000 (then you pay inland revenue!)

12 Lets try…. AGAIN!

13 The structure of a profit and loss account 1 Top part is concerned with gross profit, e.g. $ Sales300,000 Cost of sales100,000 Gross profit200,000 Note: cost of sales is the same as ‘cost of purchases’. It is deducted from sales.

14 The structure of a profit and loss accounts 2 Second part is concerned with net profit, i.e. gross profit minus expenses. $ Gross profit200,000 Expenses Salaries55,000 Rent10,000 Other5,000 Total expenses70,000 Net profit130,000

15 Your turn! Sales Cost of sales Gross profit Expenses Salaries Rent Electricity Other Total expenses Net profit $ 68,000 12,000 5,000 $ 320, ,000 ?? 160,000 90,000 70,000

Cost of sales Pg 194 Cost of sales7842  Opening Stock189  Purchases  Less closing stock Gross Profit

17 The importance of Profit They provide a measure of the success of a business They provide funds for investment in further fixed assets They act as a magnet to attract further funds from shareholders enticed by the possibility of high returns on their investment Profit is a source of more than 60% of all finance used to help companies grow; without profit, firms would stand still.

18 Why produce a profit and loss account? It is a legal requirement. Tax is paid on the profit. It summarises all the year’s transactions – as recorded in documents such as invoices. It shows the financial ‘health’ of the business. It is studied by managers, shareholders, banks, financiers and other relevant groups of people.

The Appropriation account Figure 35.4 pg

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