Statement of Profit or Loss (Cambridge International IGCSE Business)

Introduction to the statement of profit or loss

• A statement of profit or loss records the income and costs of a business incurred over a period of time (usually one year)

  • The statement is also known as an income statement

• Theprofit or loss statement identifies

  • Revenue
  • Cost of sales
  • Gross profit
  • Expenses
  • Operating profit (often known, simply, as profit)

• The extract from the statement for Toys and Trikes PLC shows figures for both 2022 and 2023, which enables year-on-year comparisons to be made

Profit or loss statement for Toys and Trikes Ltd

The statement of comprehensive income details revenue, costs and expenses over a trading year

Features of the statement of profit or loss

Spec point — "revenue, cost of sales, gross profit, expenses, profit Note: candidates will not be assessed on constructing statements of profit or loss."

Features of the statement of profit or loss

Sales revenue

• This is money generated through selling goods and services

  • Calculated by Price x Quantity

Worked Example In 2023, Toys and Trikes Ltd earned sales revenue of $274,000, up from $262,000 in 2022

Revenue increased by $8,000 between 2022 and 2023

This may be due to increased sales volume,higher prices or a combination of the two

Cost of sales

• The cost of producing or buying in the goods sold by the business during a time period

  • They include the costs of raw materials, components, labour and packaging used to produce goods

Worked Example In 2023, Toys and Trikes Ltd's cost of sales was $169,000, which included materials and labour. In 2022, its cost of sales was $154,000

Cost of sales increased by $15,000 between 2022 and 2023

This may be due to suppliers increasing prices, buying better quality supplies or increased wastage

Gross profit

• Gross profit is made when revenue is greater than the cost of sales

  • Calculated by Sales revenue - Cost of sales

Worked Example Gross profit for Toys and Trikes Ltd in 2023 was therefore

equals space $274 comma 000 space minus space$ 169 comma 000 space

equals space $ 105 comma 000

This is a decrease of $3,000 since 2022, when gross profit was $108,000

Expenses

• Expenses are all of the other costs incurred by a business that are not directly related to each unit of output

  • Examples include rent, salaries and utilities

Worked Example In 2023, Toys and Trikes Ltd's expenses were $48,000, compared to $44,000 in 2022

Expenses increased by $4,000 between 2022 and 2023

This may be as a result of increased salaries, higher utilities costs or rent increases

Operating profit

• This is profit made by a business after all costs have been deducted from revenue

  • Calculated by Gross profit - Expenses

Worked Example Operating profit for Toys and Trikes Ltd in 2023 was therefore

equals space $105 comma 000 space minus space$ 48 comma 000 space

equals space $ 57 comma 000

This is a decrease of $7,000 since 2022, when operating profit was $64,000

Decisions based on the statement of profit or loss

• Profit or loss 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

• 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

If the business is making a profit

• Is the profit higher or lower than last year?

  • If higher, what has the business done that could have led to this?

    • For example, 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 the profit higher or lower than that of competitors?

    • If lower, what can be done to become as profitable as other businesses?
    • For example, does the business need to improve the quality of the products or increase the product portfolio?

If the business is making a loss

• 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

    • For example, ecommerce growth has led to many high-street stores closing down as the number of customers has dwindled

  • 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

Exam Hint When interpreting a profit and loss statement, go beyond the figures – explain what they reveal about the business’s performance, such as rising expenses reducing profitability