1. Income Statements
Chapter 23

2. Main Financial Documents
What Are Accounts?
Accounts are the financial records of a business
They are usually consist of:
Main Financial Documents
The Balance Sheet
This tells us how much money is in the business and where it has been spent.
The Income Statement
This tells us how much profit has been made.

3. What are Accounts?
The information that goes into the accounts is gathered from the following documents:
Cheques
Order
Forms
Statements
Sales
Invoices
Delivery
Notes
Credit
Notes

4. What is an accountant?

5. Owners or Shareholders
Who Uses The Accounts?
The type of finance a business will use often depends upon how long they need the money for:
Competition
Owners or Shareholders
The Government
Managers
Employees
Creditors

6. Calculating Profit and Loss
Businesses receive money from selling goods and services.
They also have to pay costs in order to make the goods or provide the services
Profit can be calculated using the following formula:
Profit = Sales Revenue – Total Cost

7. Defining Profit and Loss
If their sales revenue is greater than their costs, then they have made a PROFIT.
Revenue > Costs = Profit
If their sales revenue is less than their costs, then they have made a LOSS.
Revenue < Costs = Loss

8. Why Produce a Income Statement?
It is a legal requirement
It summarises all the year’s transactions
It shows the financial ‘health’ of the business.
Can be used to compare trade this year with trade last year.

9. Why is profit important?
Why Profit is important
Page 285 has some - draw a mind map with all the things you also think Profit is important for. 5 minutes

10. Cash Flow Versus Profit
Cash flow and profit are different.
Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities.
Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted.
Cash flow is actually more important for the small business owner to focus on than profit.
Companies can make a profit but still have a negative cash flow and not be able to pay their bills. Not recognizing this difference is one of the biggest mistakes a small business owner can make. Small business owners need to prepare monthly cash budgets in order to make sure they know their cash flow positions.

11. How can Profit and Loss be Calculated?
Businesses usually calculate their profit or loss at the end of the FINANCIAL YEAR.
To calculate profit, a business needs to know the value of SALES, the COST OF SALES and EXPENSES.
Sales
This is total amount of money a business receives from selling its goods and services.
It is sometimes called turnover or total revenue
Cost of Sales
This is how much it costs to make the goods or provide the services.
Eg the amount paid for raw materials
Expenses
These are the overheads (fixed costs) that have to be paid
Rent and Rates
Admin Cost
Heating and Light
Advertising

12. The Structure of an Income Statement
Need to calculate how much it has cost to make the goods that have been sold
Income Statement
For Lou Pole, year ending
£ £
Sales 400,000
LESS Cost of sales
Opening Stock 100
Purchases 100,000
100,100
Less Closing Stock 100
Gross profit 300,000
Business Name and Date
Value of stock owned at the start of the year
Sales, the money from selling goods
Value of raw materials purchased during the year
100,000
Value of stock left at the end of the year. This will be next year’s OPENING STOCK
Calculated by subtracting cost of sales from sales

13. Salaries 75,000 £ £ Gross profit 300,000 LESS Expenses Rent 25,000
Expenses listed and a total given
£ £
Gross profit 300,000
LESS Expenses
Salaries 75,000
Rent 25,000
Other 14,000
Total expenses
Net profit 186,000
114,000
Calculated by subtracting expenses from Gross Profit

14. Ms Reilly’s Sweet Treats