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 three main components of an income statement:

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

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

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 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

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

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

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

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.

1Business Activity & Influences on Business

1.1Business Objectives

1.1.1Business Aims

1.1.2Business Objectives

1.1.3Business Objectives Change Over Time

1.1.4End of Topic Test - Business Aims

1.1.5Diagnostic Misconceptions - Profit

1.2Types of Organisations

1.2.1Sole Traders & Partnerships

1.2.2Limited Companies

1.2.3Limited Liability

1.2.4Unlimited vs Limited Liability

1.2.5Not For Profit & Franchises

1.2.6Multinational Companies

1.2.7End of Topic Test - Business Ownership

1.2.8Application Questions - Business Ownership

1.2.9Diagnostic Misconceptions - Company vs Business

1.2.10Diagnostic Misconceptions - Owners vs Shareholders

1.3Classification of Businesses

1.3.1Sectors

1.4Decisions on Location

1.4.1Location

1.5Business & the International Economy

1.5.1Globalisation

1.5.2Exchange Rates

1.6Government Objectives & Policy

1.6.1Government Objectives

1.6.2The Government & Business Activity

1.6.3Interest Rates

1.6.4Interest Rates - Calculations

1.6.5Diagnostic Misconceptions - Recessions

1.7External Factors

1.7.1External Factors

1.8What Makes a Business Successful?

1.8.1Measuring Success

1.8.2Reasons for Failure

2People in Business

2.1Internal & External Communication

2.1.1Communication

2.2Recruitment & Selection Process

2.2.1Types of Employment

2.2.2Recruitment Stages

2.2.3Effective Recruitment

2.2.4Legal Controls Over Employment

2.2.5Diagnostic Misconceptions - Internal Recruitment

2.3Training

2.3.1Training

2.4Motivation & Rewards

2.4.1Motivation in the Workplace

2.4.2Financial & Non-Financial Methods

2.4.3End of Topic Test - The Workforce

2.4.4Application Questions - The Workforce

2.4.5Diagnostic Misconceptions - Money

2.5Organisation Structures

2.5.1Organisational Structures

2.5.2Centralised vs. Decentralised Structures

2.5.3Tall & Flat Organisations

2.5.4Functional Areas Within a Business

2.5.5End of Topic Test - Org Structure

3Business Finance

3.1Sources of Finance

3.1.1Internal & External Sources of Finance

3.1.2Factors Affecting Sources of Finance

3.2Cash Flow Forecasting

3.2.1Cash Flow

3.2.2Consequences of Cash Flow Problems

3.2.3Cash Flow - Calculations

3.2.4Solutions to Cash Flow Problems

3.2.5Diagnostic Misconceptions - Cash Flow

3.3Cost & Break-Even Analysis

3.3.1Costs, Revenue & Profit

3.3.2Profit, Average Unit Cost & Interest

3.3.3Costs - Calculations

3.3.4Revenue - Calculations

3.3.5Break-Even Analysis

3.3.6Profit & Losses - Calculations

3.3.7End of Topic Test - Finance

3.3.8Grade 9 - Finance

3.3.9Diagnostic Misconceptions - Fixed Costs

3.3.10Diagnostic Misconceptions - Break-even

3.4Financial Documents

3.4.1Financial Statements

3.4.2Income Statement

3.4.3Understanding Business Performance

3.5Account Analysis

3.5.1Business Calculations

3.5.2Gross Profit - Calculations

3.5.3Net Profit - Calculations

3.5.4Business Calculations 2

3.5.5Business Calculations 3

3.5.6Liquidity

4Marketing

4.1Market Research

4.1.1Market Research

4.1.2Forms of Market Research

4.2The Market

4.2.1Customer Needs

4.2.2Satisfying Customer Needs

4.2.3Market

4.2.4The Competitive Environment

4.2.5Market Segmentation

4.2.6Market Mapping - Price vs Quality

4.2.7End of Topic Test - Marketing

4.2.8Application Questions - Marketing

4.2.9Diagnostic Misconceptions - Competition

4.3The Marketing Mix

5Business Operations

5.1Economies & Diseconomies of Scale

5.1.1Economies of Scale

5.1.2Diagnostic Misconceptions - Economies of Scale

5.2Production

5.2.1Production Processes

5.2.2Flow and Batch Production

5.2.3Production Efficiency

5.2.4Technology & Production

5.2.5Diagnostic Misconceptions - JIT vs JIC

5.3Factors of Production

5.3.1Factors of Production

5.4Quality

5.4.1Importance of Quality

5.4.2Identifying Quality

5.4.3Total Quality Management

5.4.4End of Topic Test - Operational Decisions

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