Revenue, cost and profit in income statement

How to calculate and use information on revenue, cost and profits in income statements

1. Revenue - Total sales

2. Cost of sale - Total cost of items sold

3. Gross profit - Revenue after cost of sale. It provides information on the profit before expenses.

4. Expenses - Also known as overheads, they are considered as fixed cost that incurs even if there are no sales.

5. Profit before tax - This is the profit that will be taxed by the government. It is the profit that is used to measure the performance of the business as it projects actual profit from business decisions made by the management.

6. Corporate tax - Corporate tax is a form of income tax (direct taxes) that must be paid

by all operating businesses.

7. Profit after tax - Profit after tax is the amount that will be distributed to

shareholders/owners or kept as retained profits.

8. Distributed profits - These are earning from investment made by shareholders on the company or owners

9. Retained profits - Retained profits are an important component in the income statement as these amounts can be used for expansion purposes or for survival during an economic recession.

How to use components in income statement

1. By comparing gross profit and profits, you would be able to identify if profits was less due to high expenses or cost of sale. This would enable a management to find ways to reduce expenses if or if cost of sale should it be the cause of low profit.

2. Revenue are compared year-on-year to determine if sales have increased. It indicates if the firm have improved its performance

3. An increase in cost of sales could indicate an increase in raw materials used to produce output

4. Overheads / Expenses are the component most firms aim to reduce as they are less likely to effect the quality of output, but are able to increase profits.

5. Gross profits, profits before tax and revenue are frequently used to measure performance of the firm. These performance ratios are the gross profit margin, profit margin and return on capital employed (ROCE)

RELATED CONCEPTS

1. Revenue

2. Cost

3. Profit

4. Expenses

5. Tax

PAST YEAR QUESTIONS

1. What is meant by ‘income statement’? (2 marks) Oct/Nov 2019/11

2. Calculate X and Y: Revenue & Expenses (2 marks) Oct/Nov 2018/11

3. Identify and explain two ways in which a firm's managers could use information contained in the income statement. (4 marks) Oct/Nov 2019/11

4. State four features of an income statement. (4 marks) May/June 2020/12

5. Identify the effect of an increase in the cost of materials on each of the following: Cost of sale & gross profits (2 marks) Oct/Nov 2019/11

6. Calculate the values of X and Y: Cost of Sales & Expenses (2 marks) Oct/Nov 2018/13

7. Calculate the revenue per day. (2 marks) May/June/2019/11

8. Calculate the revenue from selling direct to retailers in 2018. (2 marks) May/June 2019/13

9. Calculate PLK’s weekly profit. (4 marks) May/June 2019/12

10. Calculate the forecast revenue per week for the new café. (2 marks) Oct/Nov 2019/11

11. Calculate Samira’s forecast weekly revenue if she lowered the price of her products. (2 marks) Oct/Nov 2019/12

12. Identify and explain two reasons why revenue is important for Samira’s business. (4 marks) Oct/Nov 2019/12

13. Identify and explain two possible problems for KXD of not making a profit. (4 marks) Oct/Nov 2018/13