Income statements Worksheet

Profit is the financial gain that a business makes after subtracting all its costs and expenses from its total revenue. It is important because it allows a business to reinvest in growth, pay dividends to shareholders, and ensure long-term survival. [1 mark for definition, 1 mark for explanation]

The main features of an income statement include: - Revenue (sales) - Cost of sales (cost of goods sold) - Gross profit (revenue minus cost of sales) - Expenses (overheads) - Profit (gross profit minus expenses) - Retained profit (profit after dividends or other distributions) [1 mark for each correct feature, up to 3 marks]

Gross profit is the profit made after subtracting the cost of goods sold from revenue. Net profit is the profit made after subtracting all expenses, including overheads and interest, from the gross profit. [1 mark for each correct explanation]

A business might use an income statement to make decisions because it provides information on the financial performance of the business, helps identify areas where costs can be reduced, and shows the profitability of different products or services. [1 mark for each correct reason]

Retained profit is the profit that remains after a business has paid dividends to shareholders or other distributions. It is reinvested in the business for future growth. [1 mark for correct explanation]

Gross profit = Revenue - Cost of goods sold = £10,000 - £4,000 = £6,000 Net profit = Gross profit - Expenses = £6,000 - £3,000 = £3,000 [1 mark for each correct calculation]

Gross profit = Revenue - Cost of goods sold = £50,000 - £30,000 = £20,000 Net profit = Gross profit - Expenses = £20,000 - £15,000 = £5,000 The business is profitable as it has a net profit of £5,000. [1 mark for each correct calculation and 1 mark for the conclusion]

Total revenue = Selling price per unit × Number of units sold = £20 × 1,000 = £20,000 Total variable costs = Variable cost per unit × Number of units sold = £10 × 1,000 = £10,000 Total costs = Total variable costs + Fixed costs = £10,000 + £5,000 = £15,000 Profit = Total revenue - Total costs = £20,000 - £15,000 = £5,000 [1 mark for each correct calculation]

Gross profit = Revenue - Cost of goods sold = £30,000 - £15,000 = £15,000 Gross profit margin = (Gross profit / Revenue) × 100 = (£15,000 / £30,000) × 100 = 50% Net profit = Gross profit - Expenses = £15,000 - £10,000 = £5,000 Net profit margin = (Net profit / Revenue) × 100 = (£5,000 / £30,000) × 100 = 16.67% [1 mark for each correct calculation and 1 mark for each correct margin]

Gross profit = Revenue - Cost of goods sold = £80,000 - £40,000 = £40,000 Net profit = Gross profit - Expenses = £40,000 - £20,000 = £20,000 The business is making a profit of £20,000. [1 mark for each correct calculation and 1 mark for the conclusion]

Profit is important for a business for several reasons: 1. It allows the business to reinvest in growth, such as expanding operations or developing new products. For example, a tech company might use its profits to fund research and development for new software. 2. It enables the business to pay dividends to shareholders, attracting investment and maintaining shareholder confidence. For instance, a profitable retail chain might distribute dividends to its shareholders to reward their investment. 3. It ensures the long-term survival of the business by providing a financial cushion during tough times. For example, a manufacturing business might use its profits to cover costs during an economic downturn. 4. It can be used to pay off debts and reduce financial burdens. For example, a restaurant might use its profits to pay off a loan taken for renovations. [1 mark for each correct reason and 1 mark for each relevant example]

An income statement can help a business make decisions in several ways: 1. It provides information on the financial performance of the business, helping managers identify areas of strength and weakness. For example, a retail shop might use its income statement to see which products are most profitable and focus on selling more of those. 2. It helps identify areas where costs can be reduced, improving profitability. For example, a manufacturer might use its income statement to see that its expenses are too high and look for ways to cut costs, such as negotiating better deals with suppliers. 3. It shows the profitability of different products or services, helping the business decide which ones to continue or discontinue. For example, a bakery might use its income statement to see that a particular type of bread is not profitable and stop making it. 4. It helps in setting prices by providing information on the cost of goods sold and expenses. For example, a restaurant might use its income statement to determine the minimum price it needs to charge for its dishes to cover costs and make a profit. 5. It assists in budgeting and forecasting by providing a historical record of revenue and expenses. For example, a small business might use its income statement to project future revenue and expenses and create a budget for the next year. 6. It provides information for external stakeholders, such as investors and lenders, who use it to assess the financial health of the business. For example, a tech startup might use its income statement to attract investors by showing its growing revenue and profitability. [1 mark for each correct way and 1 mark for each relevant example]

Original selling price per unit = Revenue / Number of units sold = £100,000 / 5,000 = £20 New selling price per unit = Original selling price per unit × 1.10 = £20 × 1.10 = £22 New number of units sold = Original number of units sold × 0.95 = 5,000 × 0.95 = 4,750 New revenue = New selling price per unit × New number of units sold = £22 × 4,750 = £104,500 New gross profit = New revenue - Cost of goods sold = £104,500 - £60,000 = £44,500 New net profit = New gross profit - Expenses = £44,500 - £25,000 = £19,500 [1 mark for each correct calculation]