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A LevelBusinessAQARevision Notes7. Analysing the Strategic Position of a Business (A Level)7.2 Assessing the Internal Position of a BusinessThe Income Statement

The Income Statement (AQA A Level Business): Revision Note

Exam code: 7132

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

An introduction to the income statement

  • The income statement tracks a business's revenue, expenses, profit or loss (see Analysing Profitability) during a set period, usually a year

Stakeholder interest in the income statement

Stakeholder

Interest

Shareholders

  • Interested in sales revenue and net profits earned, business growth and dividend payments

Employees

  • Interested in profits earned and potential for wage increases and job stability

  • Used to determine bonuses or profit-related pay awards

Managers and directors

  • Interested in key performance data such as an improvement in sales revenue and profit or an increase in costs

Suppliers

  • Interested in the continued success of the company they are supplying

  • This information is also used by suppliers to determine the level of trade credit offered to businesses

Government

  • Used to determine how much tax is payable

  • Ensure the accounts meet legal requirements in the Companies Act, 2006

Local community

  • Interested in the stability of the business and what this may mean for jobs in the community

  • Another interest is to see if the firm is generating enough profit to approach them for sponsorship of local causes

The structure of the income statement

  • The income statement is divided into three parts

    • The trading account

    • The profit and loss account

    • The appropriation account

An example income statement

Income statement for Top to Toe Wellbeing Ltd, year ending 31 Dec 2024: Gross profit £105.73m, Net profit after tax £50.75m, Dividends £13.95m.
An example income statement, showing the trading account, profit and loss account and appropriations account

The trading account

  • The trading account is where the cost of sales is deducted from sales revenue to calculate the gross profit

    • In 2024 Top to Toe Wellbeing Limited's sales revenue was £124.65m and its cost of sales were £18.92m

      • The gross profit for the period was therefore 

equals space £ 124.65 straight m space minus space £ 18.92 straight m space equals space £ 105.73 straight m

The profit and loss account

  • The profit and loss account deducts a series of expenses to determine the operating profit for the period 

    • In 2024 gross profit was £105.73m and expenses were £39.87m

      • The operating profit was therefore 

    equals space £ 105.73 straight m space minus space £ 39.87 straight m space equals space £ 65.86 straight m

    • The business also paid £2.01m interest

      • The profit before tax was therefore

    equals space £ 65.86 straight m space minus space £ 2.01 straight m space equals space £ 63.85 straight m

    • The business also paid £13.10m tax

      • The profit after tax for the period was therefore

equals space £ 63.85 straight m space minus space £ 13.10 straight m space equals space £ 50.75 straight m

The appropriations account

  • The appropriations account shows how profits are distributed for the period

    • In 2024 Head to Toe Wellbeing Limited distributed £13.95m to shareholders as dividends

      • £36.80m was therefore retained as profit

Notes to the accounts

  • Public limited companies are required by law to include details of

    • Depreciation of non-current assets

    • Directors' earnings

    • Audit details, including the identity and costs of the appointed auditor

    • Employee details, such as the size of the workforce, wage and salary costs, pension liabilities and national insurance contributions

    • Extraordinary items, which are significant one-off items of income or expenditure that are unlikely to be repeated, such as the relocation of a head office

    • Exceptional items, which are significant one-off items of income or expenditure that are unusual but a part of normal trading activities, such as a very large order placed by a customer

Profit quality

  • Profit quality measures how reliable and sustainable a company’s reported profit really is

    • It considers whether profit comes from normal, cash-generating activities or from one-off, non-cash or unreliable sources

High-quality profit

Poor-quality profit

  • Recurrent, cash-backed revenue

    • An example is subscription fees at a streaming service like Netflix, where most income is monthly, predictable and converts directly into cash

  • Core operation strength

    • For example, a business like Unilever generating steady profits from popular household brands

  • Healthy profit margins

    • E.g. Businesses that consistently earn high profits on sales (e.g. luxury goods maker Hermès) without relying on cost-cutting or price promotions

  • One-off gains

    • E.g. A manufacturer such as Rolls Royce selling surplus land or equipment that cannot be disposed-of again

  • Accounting adjustments

    • Examples such as recognising supplier refunds early or changing depreciation methods can inflate profit without adding any real cash

  • Non-cash or volatile items

    • E.g. Overseas sales generating extra income as a result of exchange rate changes

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.