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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 SheetWhy 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 profitSales 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 Revenueb. Cost of Goods Soldc. Gross Profitd. Expensese. Net profit
Task: Calculations AnswersSales 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
1
3
2
6
5
4
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 PlcFor 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 minutesQuestion: Passionate Pizza