The Main Features of an Income Statement | Business Studies for GCSE/IGCSE - Year 11 PDF Download

An Introduction to Income Statements

• An income statement, also known as a profit-and-loss account, summarizes a business's income and costs over a specific period, typically a year.
• It calculates four types of profit: Gross profit, net profit, profit after tax, and retained profit.
• Understanding the income statement is crucial for evaluating a company's financial performance and making informed decisions.
• The extract from an income statement for a company like Toys and Trikes PLC provides data for 2022 and 2023, facilitating year-on-year comparisons.

Diagram: Income Statement for Toys and Trikes Ltd

Main Components of an Income Statement

• Sales Revenue refers to the income generated from the sale of goods and services. It is calculated by multiplying the price per unit by the quantity sold. In 2023, Toys and Trikes Ltd earned $274,000 in Sales Revenue.
• Cost of Sales represents the expenses incurred in producing or purchasing the goods actually sold by the business during a specific period. This includes the costs of raw materials and labor utilized in production. In 2023, Toys and Trikes Ltd had a Cost of Sales amounting to $169,000, covering materials and labor costs.
• Gross Profit is the profit realized when Sales Revenue exceeds the Cost of Sales. It is computed by subtracting the Cost of Sales from the Sales Revenue. Therefore, Toys and Trikes Ltd achieved a Gross Profit of $105,000 ($274,000 - $169,000) in 2023.
• Net Profit denotes the profit remaining after deducting all expenses from the Gross Profit. It is calculated by subtracting Expenses from Gross Profit. In 2023, Toys and Trikes Ltd attained a Gross Profit of $105,000. After incurring expenses totaling $48,000 (including advertising and equipment costs), the Net Profit amounted to $57,000 ($105,000 - $48,000).
• Profit after Tax is the profit calculated for limited companies, accounting for corporation tax paid on net profits. In 2023, Toys and Trikes Ltd recorded a Net Profit of $57,000. With a tax payable of $11,000, the Profit after Taxes equaled $46,000 ($57,000 - $11,000).
• Retained Profit represents the profit remaining for reinvestment into the business after any dividends have been distributed to shareholders. In 2023, Toys and Trikes Ltd achieved a Profit after Tax of $46,000. After distributing dividends amounting to $22,000, the Retained Profit stood at $24,000 ($46,000 - $22,000).