6.2.3 Income Statement

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An income statement, also known as a Profit and Loss Account, is a financial statement that shows how a company earns its income and incurs its expenses over a specific period of time.

1. Sales Revenue

Sales revenue represents the total amount of money a business makes from selling its goods or services. This is the top line on the income statement and often referred to as gross sales. It does not account for any deductions such as returns or discounts.

Exercise: Imagine you're running a book store and you've sold 1,000 books in a month, each for £20. What is the sales revenue?
The sales revenue would be 1,000 x £20 = £20,000.

2. Cost of Sales (or Cost of Goods Sold, COGS)

Cost of Sales represents the cost of producing the goods or services that a company has sold during a particular period. This includes the cost of materials and direct labor costs to produce the goods or services.

Exercise: Continuing with the bookstore example, suppose each book costs you £10 to purchase from your supplier. What is the cost of sales?
The Cost of Sales would be 1,000 x £10 = £10,000.

3. Gross Profit

Gross Profit is calculated by subtracting the Cost of Sales from the Sales Revenue. It represents the profit a company makes after deducting the costs associated with making and selling its products.

Exercise: Can you work out the gross profit for the bookstore?
The gross profit would be your Sales Revenue (£20,000) – Cost of Sales (£10,000) = £10,000.

4. Expenses

Expenses are the costs not directly tied to the production of goods or services. This could include rent, utilities, marketing and advertising, office supplies, salaries for employees not directly involved in production, and depreciation.

Exercise: Imagine your bookstore's expenses include £2,000 for rent, £500 for utilities, and £1,500 for marketing and other expenses. What are the total expenses?
The total expenses would be £2,000 + £500 + £1,500 = £4,000.

5. Net Profit

Net Profit, also referred to as the ‘bottom line’, is calculated by subtracting total expenses from the gross profit. It shows what the company has earned or lost after all costs and expenses are considered.

Exercise: Can you work out the net profit for the bookstore using the numbers from the exercises above?
The net profit would be Gross Profit (£9,000) – Expenses (£2,000) = £7,000.

Now you can construct a simple income statement. Here’s what it would look like with the numbers from our example:

Income Statement for Bookstore 2022-2024

Sales Revenue£20,000£30,000£35,000
Cost of Sales£10,000£14,000????
Gross Profit£10,000????£18,000
Net Profit£6,000????£10,000
The bookstore has grown in 2023, can you work out the new gross profit and net profit? Can you challenge yourself and work out the cost of sales and expenses for 2024?

Sales Revenue£20,000£30,000£35,000
Cost of Sales£10,000£14,000£17,000
Gross Profit£10,000£16,000£18,000
Net Profit£6,000£10,000£10,000

An income statement provides a view of a business’s profitability. It is used by investors, creditors, and other stakeholders to understand the financial health of a company.

6.2.3 Cash Flow Forecast

6.2.3 Statement Of Financial Position (Balance Sheet)