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Understanding Income Statements

For Business Studies A2, it is important to understand what an income statement is, how to analyse the figures on an income statement and interpret the data too. You can learn quite a lot about a business through an income statement.

All companies need to produce an annual income statement. Ltd’s can keep their information private. However, Plc’s have to publish their income statements. 
The format for income statements are roughly all the same and are as follows (all numbers in an income statement will have a currency):
  • Sales – This is the revenue of the business (all the money that is coming into the business).
  • Cost of Sales – The costs of sales can also be known as the variable costs or the cost of stock.
  • Gross Profit – This is Sales – Cost of Sales. If this number is a high percentage of Sales, it could be considered the business has a high gross profit margin.
  • Expenses/overheads – These are the fixed costs of the business and all other operating costs. 
  • Operating Profit – This is another word for the ‘Net Profit’ of a business.
  • ‘Net’ Finance Costs – Finance costs take into consideration the cost of loans, overdrafts and other sources of finance
  • Profit before tax – This is the amount liable for corporation tax which is approximately 25%.
  • Tax – Self explanatory. The amount of money the business has to pay for tax.
  • Profit for the year – This is the money the business get to keep. There are no further reductions in profit of the year. This money is available to pay dividends for shares or re-invest to expand the business. Profit of the year or savings are also know as ‘Reserves’.
After reading the structure of an Income Statement, you may still be confused about it. Look at it in this way,  at the top of an income statement is where the business has the most amount of money. The further down an income statement you go, the further this amount of money decreases due to the numerous amount of expenses there are to a business:

I think that makes an Income Statement look a lot simpler than it looks on paper normally!


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