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Aims & Objectives
Aim:• Understand income statementsObjectives:• Define income statements• Explain the components of income statements• Analyse operating and gross profit margins• Evaluate the quality of profits
Standard Life PLC Income Statement 2009/2009
2008 (£m) 2009 (£m)
Revenue 54 52
Gross Profit 32 35
Operating Profit 3.5 4
Revenue from other Sources
12 0
Profit for Period 15.5 4
• What do you think the financial objectives of Standard Life PLC are?• Do you think the performance of Standard Life PLC has improved or
deteriorated between 2008-2009?
Income Statement
Definition:• A financial document that summarises a businesses
trading activity and expenses to show whether it has made a profit or a loss.
• Found in the annual report.
Income StatementDefinition:• A financial document that summarises a businesses trading
activity and expenses to show whether it has made a profit or a loss.
• Found in the annual report.
Income Statement of Ted Baker PLC for the 52 Weeks ending 27 January 2007
£000s £000s
Revenue 125,648
Cost Of Sales 51,986
Gross Profit 73,662
Operating Costs 53,612
Operating Profit 20,050
Income Tax Expense 5,634
Profit For The Period 14,416
Attributed to Equity Shareholders of Parent
Company 14,416
• Revenue – Cost of Sales• Cost of sales includes direct costs for
example raw materials, labour.Gross Profit
• Profit after all other expenses have been deducted, also referred to as net profit.
• Indirect costs are deducted eg. Rent
Operating Profit
• (Gross Profit/Sales) X 100Gross Profit Margins
• (Operating Profit/Sales) X 100• Gives a clearer indication of the businesses’
control over operating expenses.
Operating Profit Margins
Activities:
1) Using the above income statement, calculate the operating profit margin and gross profit margin for Ted Baker Plc.
2) What do these figures show you?3) How significant do you think the Ted Baker brand
name is in achieving the gross profit margin?
Activities:
1) Complete the below Income Statement of Ted Baker PLC for 2007.
2) Calculate the operating profit margin and gross profit margin for Ted Baker Plc.
3) Has Ted Baker become more profitable over time or less profitable?
4) What reasons may there be for this? Between 2007 and 2008 the minimum wage increased in the UK.
Profit Quality
Looks at how sustainable profits are.
What percentage is from routine day-to-day
activity as apposed to non-routine activity (selling off assets).
High Quality Vs Low Quality
High Quality• Profit which can be
repeated• Not reliant on one-off
profits• Shareholders can have
some confidence in the profit trend
Low Quality• Difficult to repeat• One-off profits usually
caused by sale of assets• Shareholders need to adjust
reported profit to assess what the likely profit is for next year.
Profit Utilisation
• How profit is being used.
• Whether it is being ploughed back into the business or distributed to shareholders.