IB Business and Management 3.5 Final Accounts - Income Statements (Profit and Loss Accounts)

Learning Outcomes Explain the purpose of an income statement Construct and amend accounts from information given

FINAL ACCOUNTS What does this mean?

What are final accounts? The financial statements of an organization made up at the end of an accounting period, usually the fiscal year. These accounts report on the company’s performance Key final accounts: Income Statement – Trading account – Profit and Loss Account – Appropriation Account Balance Sheet Why do businesses produce final accounts?

Why produce final accounts? Legal requirement for incorporated businesses To calculate tax owed To aid decision making As part of a business plan To gain finance

PROFIT AND LOSS ACCOUNTS (INCOME STATEMENTS)

What is a Profit and Loss Account (Income Statement) A Profit and Loss Account is a record of revenues and costs of the business over a period, usually a year It also shows: How much profit/loss was made How much tax was paid What happened to the profit

Working out the profit Sales Revenue £1000 Cost of Goods Sold/Cost of Sales £250 Gross Profit £750 Expenses £450 Net Profit £300

Sales Gross Profit Net Profit Minus: Cost of Sales Minus: Expenses Opening Stock + Purchases – Closing Stock Total of all the Businesses expenses

Task: Calculations Jeff’s Jukeboxes Ltd has sales of 500 units a month, at a selling price of £1,000 At the start of the month Jeff had stock of components values at £20,000. During the month he purchased a further £360,000 of stock. His end of month stock check showed he had £25,000 worth of stock left He also has to pay out Rent £2,000, Salaries £9,000, Utilities £500, Business rates £450 and advertising £50 Calculate his: a.Sales Revenue b.Cost of Goods Sold c.Gross Profit d.Expenses e.Net profit

Task: Calculations Answers Sales Revenue = 500 units * £1,000 = £500,000 Cost of Goods Sold = £20,000 + £360,000 - £25,000 = £355,000 Gross Profit = £500,000 - £355,000 = £145,000 Expenses = £2,000 + £9,000 + £500 + £450 + £50 = £12,000 Net Profit = £145,000 - £12,000 = £ 133,000

Trading Account – Shows the Gross Profit Profit and Loss Account – Shows the Net Profit Appropriation Account Shows what was done with the profit Task – Create a Trading and Profit and Loss Account for Jeff’s Juke Boxes

The IB Structure of a P&L Account

Key Formulae Cost of Goods Sold = Opening Stock + Cost of Purchases – Closing Stock Gross Profit = Sales Revenue – Cost of Goods Sold Net Profit = Sales Revenue – Cost of Goods Sold - Expenses (Gross Profit – Expenses)

See if you can fill in the missing figures? You must be able to explain how you worked them out

Task Answer ALL questions on the question sheet ‘Analysing Profit and Loss Accounts’

Task – Let’s make it a bit more difficult! You are going to make some adjustments to a profit and loss accounts Read through the information on Dalton Plc For each scenario in Exercise 1 State the effect on: – Sales Revenue – COGS – Gross Profit – Expenses – Net Profit before interest and tax

Homework Task Complete Exercise 4 and 5 on the Dalton Plc

IB Time!! Time: 13 minutes Question: Passionate Pizza