3.3.2
Income Statements
Income Statement
Income Statement
An income statement shows a business’ financial performance over a period of time. It shows the revenue, costs, and profits of a firm. There are 2 main components of an income statement:


Trading account
Trading account
- This shows the total revenue a firm has made from sales, the cost of sales and the gross profit.
- Cost of sales are any costs that are directly associated with making and selling the products.
- For example, for a firm like Aston Martin that manufactures and sells cars, the costs of sales would include the cost of the materials to make the cars and the cost of the labour that helped to make and sell the car. It does not include things like rent for the factory or advertising.
- Gross profit = Revenue - Cost of Sales


Profit and loss account
Profit and loss account
- This includes all expenses not directly involved in making and selling the product. It works out net profit.
- Other expenses included are rent, advertising, depreciation and much more.
- Operating Profit = Gross Profit – Expenses
- Net Profit = Total Revenue - Total Costs. This is the amount left over after all costs (including interest payments) have been taken away.
Interpreting the Income Statement
Interpreting the Income Statement
Financial statements may be used by lots of stakeholders (shareholders, investors, suppliers and creditors). The income statement tells us about a business’ performance.


Profit
Profit
- Profit is the most important thing to look at because it is what owners and investors aim to make. If a firm is making a loss then it can be a worrying sign.
- Financial statements can help you to analyse why a firm might make a loss. If a firm is making a loss, look at gross profit, operating profit and net profit to see where a firm might be going wrong.


Costs
Costs
- Comparing a firm’s costs to costs in previous years and the costs of competitors can help us to understand what is happening to a company’s cost base.


Margins
Margins
- Profit margins are a very important measure of whether a firm has the potential to be very profitable.
- The gross profit margin shows the profit margin when only including the direct costs associated with making and selling the product. If a firm’s gross profit margin is negative or very low then it is a very worrying sign for the firm.
- If the gross profit margin is positive but the net profit margin is negative, then it is important to try and analyse which expenses may be the largest and may be causing this difference.


Competitors
Competitors
- Comparing a firm’s current financial performance to competitors gives a good indication of whether the firm is doing well in its specific market.
- A firm may seem to be very profitable with high profit margins but when compared to its competitors its profits and profit margins are much lower.
- This gives us more information because it shows that the firm has room for improvement.


Year on year improvement
Year on year improvement
- Comparing a firm’s income statement to previous years will show whether the firm’s performance is improving over time or getting worse.
- Growth – comparing revenue to previous years will show whether the firm is growing or not in terms of its sales revenue.
- Costs – will show how the costs the firm is facing are changing over time. In particular, if the firm suddenly goes from making a profit to making a loss, comparing it to previous years will show which costs have increased and are causing the drop in performance.
1Exploring Business
1.1Features of Business Organisations
1.2Organisation of Businesses
1.3Business Environment
1.3.1External Influences
1.3.2Political & Legal Change
1.3.3Economic Environment
1.3.4Social & Technological Environment
1.3.5Lifestyle & Technological Environment
1.3.6Corporate Social Responsibility
1.3.7The Competitive Environment
1.3.8Innovation
1.3.9Risk & Uncertainty
1.3.10Porter's Five Forces
1.3.11SWOT Analysis
2Marketing Campaigns
2.1Marketing
3Business Finance
3.1Sources of Finance
3.2Financial Planning
3.3Financial Statements
4International Business
4.1Globalisation
4.2International Business
4.3International Economic Environment
4.4Factors Affecting International Business
5Principles of Management
5.1Management & Leadership
5.2Theories of Motivation
6Business Decision Making
6.1Business Principles & Practices
6.2Quality Management
6.3Human Resources
6.4Documents & Business Decisions
Jump to other topics
1Exploring Business
1.1Features of Business Organisations
1.2Organisation of Businesses
1.3Business Environment
1.3.1External Influences
1.3.2Political & Legal Change
1.3.3Economic Environment
1.3.4Social & Technological Environment
1.3.5Lifestyle & Technological Environment
1.3.6Corporate Social Responsibility
1.3.7The Competitive Environment
1.3.8Innovation
1.3.9Risk & Uncertainty
1.3.10Porter's Five Forces
1.3.11SWOT Analysis
2Marketing Campaigns
2.1Marketing
3Business Finance
3.1Sources of Finance
3.2Financial Planning
3.3Financial Statements
4International Business
4.1Globalisation
4.2International Business
4.3International Economic Environment
4.4Factors Affecting International Business
5Principles of Management
5.1Management & Leadership
5.2Theories of Motivation
6Business Decision Making
6.1Business Principles & Practices
6.2Quality Management
6.3Human Resources
6.4Documents & Business Decisions
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