Using the Income Statement (AQA GCSE Business)
Revision Note
Profit Margins
Profit margins measure how successfully a business converts revenue into profit
Profitability can be measured in two ways:
The gross profit margin
The proportion of revenue that is converted into gross profit
It is calculated using the formula
Worked Example
Head to Toe Wellbeing’s revenue in 2022 was $124,653. Its gross profit was $105,731
Calculate Head to Toe Wellbeing Ltd’s gross profit margin in 2022. [2 marks]
Step 1: Substitute the values into the formula
[1]
Step 2: Multiply the outcome by 100 to find the percentage
[1 mark]
84.82% of Head to Toe Wellbeing’s revenue was converted into gross profit during 2022
The net profit margin
The proportion of revenue that is converted into net profit
It is calculated using the formula
Worked Example
Head to Toe Wellbeing’s revenue in 2022 was $124,653. Its net profit was $65,864
Calculate Head to Toe Wellbeing Ltd’s net profit margin in 2022. [2 marks]
Step 1: Substitute the values into the formula
[1]
Step 2: Multiply the outcome by 100 to find the percentage
[1]
In 2022, 52.84% of Head to Toe Wellbeing’s revenue was converted into profit before interest and tax
Profit margins are expressed as percentages
This allows comparison of business performance over time and also comparisons with other businesses
Stakeholders and profitability
Several stakeholders are interested in profitability
Investors look carefully at profitability when deciding which business to invest in
The higher the level of profitability, the higher their rewards are likely to be
Directors and managers consider profitability when assessing business success and determining future objectives and strategy
Employees may consider profitability as justification for requesting higher wages or better working conditions
Using the Income Statement to Judge Performance
Income statements inform managers whether the business is making a profit or loss
They allow managers to:
Compare performance to previous years
Make future forecasts
Make comparisons with competitors
Finance managers are able to interrogate the data in order to make decisions, 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
Diagram: Extracts from Chillie's Cafe's Income Statement
The income statement contains a range of information that can be used to make decisions and judge performance
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
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Examiner Tip
You will not be given the formulas in the exam, so you must ensure that you revise them thoroughly. You are usually asked to state the formula before applying it to a calculation.
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