5.3.3 Income Statements 1. Learning Outcomes To understand the main features of an income statement To be able to use simple income statements in decision

5.3.3 Income Statements

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Learning Outcomes

• To understand the main features of an income statement

• To be able to use simple income statements in decision making based on profit calculations

The Income Statement

• Shows a firm’s sales revenue and its costs over a trading period, as well as the distribution of any profit

• An income statement is divided into three sections:1. Trading Account2. Profit and Loss Account3. Appropriation Account

• Have a look at Tesco’s (simplified) income statement…

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Income Statement of Tesco plcfor the year ended 25 February 2008

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Add: Other income 450Less: expenses Net profit

(1,277)

Less: TaxationProfit after taxDividends paid (792)Retained profit

(673)

Turnover 47,298Less: Cost of SalesGross profit

£m £m

(43,668)Trading Account

Profit and Loss Account

Appropriation Account


1. Trading Account2. Profit and Loss Account3. Appropriation Account

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1. The trading account• Finds the gross profit generated by the business by

comparing sales with the cost of the sales for the period • Cost of sales: Stocks. Calculated by taking the cost of the

goods available for sale during the year and deducting the cost of the goods which were unsold

• The reason for this calculation is so that sales and cost of sales compare like with like – i.e. only the stocks that were actually sold in the year are counted as costs of sales (making the unrealistic assumption that stocks bought first are sold first)

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OpeningStock

PurchasesDuring year

ClosingStock

+ –Cost ofSales =

The trading account of Strachan Ltd for the year ending 31 December 2006

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Sales 120Less: Cost of sales

Stock, at 1 January 2006 14Add: Purchases of goods 83

97Less: Stock held on 31 December 2006

(87)

£(‘000) £(‘000)

(10)

Gross profit 33Closing stock

Opening stock

Purchases

The trading account task – Samba Ltd

• Samba Ltd is a medium-sized company selling ethnic foods to small retailers across the Midlands

• Identify the relevant information from the table below and prepare the company’s trading account for the year ended 31 May 2006

Sales revenue £1,450,000 Opening stock £34,000

Stock purchases £660,000 Closing stock £42,000

Wages £150,000 Distribution £60,000

Rent and rates £60,000 Advertising £30,000

Other expenses £94,000 Other income £0

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2. Profit and loss account

• Shows other items of income earned and expenditure paid out by the business, in order to arrive at the net profit

• Other income: Income which is not earned from the normal trading activities of the company. e.g.:– Interest from bank deposits– Dividends from shares held in other companies– Rent from property that is let out

• Other expenses: Overheads – Indirect costs of production such as distribution costs, advertising, packaging and salaries

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The profit and loss account of Simon and Jasmine Ltd for the year ending 30 April 2007

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Gross profit 140Other income

Rent received 15

155

£(‘000) £(‘000)

Less: other expenses:Rent 10Postage 3Stationary 2Salaries 60Depreciation 15Delivery costs 4Advertising 6

(100)

Net profit 55

Think of five examples of overheads other than those shown

The Profit and loss account task – Samba Ltd

• Now prepare Samba Ltd’s profit and loss account for the year ended 31 May 2006






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Trading and Profit and Loss AccountICT task

• Create a self-calculating spreadsheet model of Samba Ltd’s trading and profit and loss account for the year ended 31 May 2006

• Adjust the model to take account of:– A 15% rise in sales– A rise in the price of diesel increasing distribution costs by 10%– £28,000 of closing stock








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3. Appropriation account

• Shows how the net profit has been dispersed • Net profit is used for:

– Corporation Tax (for incorporated businesses)– Dividends to shareholders - Determined by

the board of directors and approved by the shareholders at the AGM

– Reinvestment (retained profit)

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The appropriation account of Matthew and Sarah Plc

for the year ending 30 June 2007

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350

230

Profit after tax

Net profit 540

Corporation tax (190)

£(‘000)

Dividends paid (120)

Retained profit

The appropriation account task – Samba Ltd

• Continue Samba Ltd from previously:– Samba pay Corporation Tax at 25% on net

profits– Shareholders accept a dividend costing the

firm £95,000

• Draw up the Appropriation Account for the company

• How much money is reinvested for next year?

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The appropriation account of Samba Ltd

for the year ending 31 May 2006

Dividends paid (95,000)

Retained profit 208,000

Profit after tax 303,000

Net profit 404,000

Corporation tax (101,000)

£


FitnessFreak Ltd

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Task• Prepare a full profit and loss account for FitnessFreak Ltd

for the year ending 31 December 2006 from the following information:– Last year, FitnessFreak Ltd sold exercise bikes worth a total of

£750,000– The company paid £70,000 in wages (which it classes as an

overhead) for its shop-floor employees and £35,000 for its managers, sales staff and administration staff

– A further £475,000 was spent on steel and components, £6,000 was spent on photocopying, stationary, postage etc. and £8,600 on insurance cover

– During the year the interest paid on loans came to £4,800, and £40,000 was spent on power

– The company estimated the depreciation cost of the machinery was £8,000

– The tax bill for the year amounted to £22,600– Directors of FitnessFreak have decided that 30% of the

remaining profit will be distributed to shareholders and that 70% will be retained as reserves

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Documents

5.3.3 Income Statements 1. Learning Outcomes To understand the main features of an income statement To be able to use simple income statements in decision