The Main Features of an Income Statement (Cambridge (CIE) O Level Business Studies)

An Introduction to Income Statements

• An income statement records the income and costs of a business incurred over a period of time (usually one year)

  • The statement is also known as a profit-and-loss account

• Four types of profit are calculated in the income statement

  • Gross profit, net profit, profit after tax, and retained profit

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

Diagram: income statement for toys and trikes Ltd

The main features of an income statement

Sales revenue

• Money generated through selling goods and services

• Calculated by Price x Quantity

  • In 2023, Toys and Trikes Ltd earned Sales Revenue of $274,000

Cost of sales

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

• Includes the costs of raw materials and labour used to produce the goods

  • In 2023, Toys and Trikes Ltd had Cost of Sales of $169,000, which included materials and labour

Gross profit

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

• Calculated by Sales Revenue - Cost of Sales

  • The Gross Profit for Toys and Trikes Ltd was therefore $274,000 - $169,000 = $105,000

Net profit

• Profit made by a business after all costs have been deducted from revenue

• Calculated by Gross Profit - Expenses

  • In 2023, Toys and Trikes Ltd made a gross profit of $105,000 

  • It had expenses of $48,000, which included advertising and equipment

  • The Net Profit was therefore $105,000 - $48,000 = $57,000

Profit after tax

• The income statement for limited companies needs to account for corporation tax paid on net profits

  • In 2023, Toys and Trikes Ltd made a Net Profit of $57,000 

  • The tax payable was $11,000

  • The Profit after Taxes was therefore $57,000 - $11,000 = $46,000

Retained profit

• Profit remaining for reinvestment into the business after any dividends have been distributed to shareholders

  • In 2023, Toys and Trikes Ltd made a Profit after Tax of $46,000 

  • The dividends payable were $22,000

  • The Retained Profit was therefore $46,000 - $22,000 = $24,000