Using Income Statements to Make Decisions (Cambridge International IGCSE Business)
Exam board Cambridge International · IGCSEUpdated 2025-06-12
Using income statements in decision-making
Spec point — "• Use simple income statements in decision- making based on profit calculations (constructing income statements will not be assessed)"
Using income statements in decision-making
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Income statements inform managers whether the business is making a profit or loss
- They allow the comparison of performance to previous years, **aid with future forecasts **and can be used to make comparisons with competitors
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Finance managers are able to** interrogate the data** in order to make beneficial changes or set new strategic objectives
Case Study Chillie's cafe
- Chillie's cafe sells cold drinks during the summer season in central Berlin
- Its two best-selling products are bubble tea and smoothies
Although Chillie's sells bubble tea drinks at a higher price, smoothies are more profitable for the business
- Fewer bubble tea drinks than smoothies are sold, so revenue is lower
- The cost of sales of bubble tea are higher than those for smoothies
Questions to consider when analysing the income statement
| Business is making a profit | Business is making a loss |
|---|---|
| - Is the profit higher or lower than last year? - If higher, what has the business done that could have led to this? - E.g. Finding a cheaper supplier of raw materials or increasing sales due to a new promotional campaign - If lower, why is profit falling? - Have costs increased, such as higher energy bills for the premises, or have sales fallen due to a new competitor entering the market? | - Is this a short-term or long-term problem? - Lower profits may be a result of an external shock affecting all businesses, such as the 2020 Covid pandemic, in which many businesses had to close or reduce working hours - Some losses may be more long-term - E.g. E-commerce growth has led to many high-street stores closing down as the number of customers has dwindled |
| - Is the profit higher or lower than that of competitors? - If lower, what can be done to become as profitable as other businesses? - E.g. Does the business need to improve the quality of the products or increase the product portfolio? | - Are competitors making losses? - If they are, the business needs to consider whether the industry is changing to the point that it may become extinct - Alternatively, it needs to ask tough questions about what can be done to evolve with changing market conditions |
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