- Can be measured in different ways.
- Main ones are gross profit, operating profit and profit of the year. (net profit).
- Gross profit = turnover (or sales revenue or total revenue) minus variable costs, usually shown as costs of sales or cost of goods sold (COGS).
- Gross profit = turnover - variable costs.
- Provides useful guide but does not take into account fixed costs (overheads).
- Businesses need to know how much money is left after all costs have been paid.
- Gross profit - fixed costs (overheads).
- Operating profit = Turnover - (Fixed + Variable costs).
- Key indicator of the businesses performance and a figure that shareholders will watch very carefully over time.
- Also known by EBIT (Earnings Before Interest and Taxes).
- Does not include any profit earned after investments might have or the effects of interest rates or taxes.
Profit for the Year (net profit)
- Operating profit - tax plus interest. Interest may be positive or negative.
- Profit for the Year = Turnover - (Fixed + Variable Costs) - (Tax + Interest)
- Profit for the year, net profit, net income and net earnings are different terms for the same thing.
- Appears at the bottom of the income statement.
- What is left over after all costs and expenses have been deducted out of total revenue.
- The amount of profit that goes to owners of the business who then choose what to do with it.
- Can be ploughed back into the business or can provide a dividend for owners/shareholders.
Statement of Comprehensive Income (Profit or Loss Account)
- Gross profit, operating profit and profit for the year are all part of this. (previously called the profit and loss account.
- Sets out figures for sales revenue (turnover) and then deducts each different group of costs to arrive at a figure for profit (or loss).
- Sometimes referred to as an income statement.
- Measures financial performance of a business.
- All limited companies by law should produce an income statement.
- However, in any case, they need to keep financial records for their own planning and monitoring needs, as well as the taxman.
- Summarises all transactions over a specified period, usually a year or a quarter.
- Vary from one business to another. Accoutants do not use the same terms in exactly the same way.
- All follow roughly the same pattern, starting with sales revenue and deducting all costs to show how profit has been calculated.
- The stages are:
Revenue: minus the cost of sales
Gross Profit: minus other operating expenses
Operating Profit: minus taxes and interest
Profit for the Year
- Profitability- describes the ability of a business to generate profits from it's resources. Profit figures on their own may not helo in making comparisons. Relates to profit levels and the size of the business.
- Can't tell if profitability has improved without using a profit margin, which is a financial ration (a figure calculated from the income statement figures to give useful information to the business managers).
- Profit Margin - tells the business…