This summary contains all the information from Chapter 33 that CIE could ask students about Financial Statements, such as:
Statement of profit or loss (content, use and explanation)
The Statement of financial position (content, meaning and purpose)
Relationship between the financial statements...
33.1 Statement of profit or loss
● Also called an income statement and a profit or loss account
● A detailed statement is produced for internal use because managers need as
much financial information as possible
● It should be produced as frequently as information is necessary, like once a
month
● A less detailed summary statement is included in the published accounts of
companies for external users
● This is produced less frequently like once a year and it only contains limited
information as detailed data would give competitors a real insight into their
rivals’ strengths and weaknesses
The contents of a statement of profit or loss
● The statement of profit or loss has three sections:
○ Trading account
○ Profit or loss section
○ Appropriation account
The trading account
● This account shows how gross profit (or loss) has been made from the trading
activities of the business
● Total revenue = selling price x quantity sold
, ● The cost of sales figure won’t be the same as the total value of goods
purchased by the company during the year because some items may have
been added to inventories or taken from them
● Only the goods used and sold during the year are recorded in the cost of
sales
● gross profit = revenue - cost of sales
● cost of sales = (opening inventories + purchased) - closing inventories
Profit or loss account section
This section calculates three profit figures:
1. The profit from operations (operating profit = gross profit - overhead
expenses)
● Overhead expenses are expenses of the business that aren’t directly
related to the number of items sold or made
● These can include rent, management salaries, marketing costs
2. Profit before tax = operating profit - interest costs
3. Profit for the year = profit before tax - profit tax
Appropriation account
● The final section shows how the profit for the year is distributed between the
owners in the forms of dividends to company shareholders as retained
earnings
Uses of statements of profit and loss
● It can be used to measure and compare the performance of a business over
time or with other firms and ratios can be used to help with the analysis
● The profit data can be compared to budgeted profit levels
● Bankers and creditors will need the information to help guide whether to lend
money to the business
● Investors will use the profit performance of the business as a guide to whether
to buy the shares in it or not
● Profits made by developing, producing and selling exclusive product designs
are high-quality profits because these are likely to be a continuous source of
profit for some time to come
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