Statement of Profit or Loss (Cambridge (CIE) IGCSE Business): Revision Note

Introduction to the statement of profit or loss

• A statement of profit or loss records the income and costs of a business incurred over a period of time (usually one year)

  • The statement is also known as an income statement

• Theprofit or loss statement identifies

  • Revenue

  • Cost of sales

  • Gross profit

  • Expenses

  • Operating profit (often known, simply, as profit)

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

Profit or loss statement for Toys and Trikes Ltd

Features of the statement of profit or loss

Sales revenue

• This is money generated through selling goods and services

  • Calculated by Price x Quantity

Cost of sales

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

  • They include the costs of raw materials, components, labour and packaging used to produce goods

Gross profit

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

  • Calculated by Sales revenue - Cost of sales

Expenses

• Expenses are all of the other costs incurred by a business that are not directly related to each unit of output

  • Examples include rent, salaries and utilities

Operating profit

• This is profit made by a business after all costs have been deducted from revenue

  • Calculated by Gross profit - Expenses

Decisions based on the statement of profit or loss

• Profit or loss statements inform managers whether the business is making a profit or loss

  • They allow the comparison of performance to previous years, aid with future forecasts and can be used to make comparisons with competitors

• Finance managers are able to interrogate the data in order to make beneficial changes or set new strategic objectives

If the business is making a profit

• Is the profit higher or lower than last year?

  • If higher, what has the business done that could have led to this?

    • For example, finding a cheaper supplier of raw materials or increasing sales due to a new promotional campaign

  • If lower, why is profit falling? 

    • Have costs increased, such as higher energy bills for the premises, or have sales fallen due to a new competitor entering the market?

  • Is the profit higher or lower than that of competitors?

    • If lower, what can be done to become as profitable as other businesses?

    • For example, does the business need to improve the quality of the products or increase the product portfolio?

If the business is making a loss

• Is this a short-term or long-term problem?

  • Lower profits may be a result of an external shock affecting all businesses, such as the 2020 Covid pandemic, in which many businesses had to close or reduce working hours

  • Some losses may be more long-term

    • For example, ecommerce growth has led to many high-street stores closing down as the number of customers has dwindled

  • Are competitors making losses?

    • If they are, the business needs to consider whether the industry is changing to the point that it may become extinct

    • Alternatively, it needs to ask tough questions about what can be done to evolve with changing market conditions