Income Statements

A2 Business Studies

Aims & Objectives

Aim:• Understand income statementsObjectives:• Define income statements• Explain the components of income statements• Analyse operating and gross profit margins• Evaluate the quality of profits

Standard Life PLC Income Statement 2009/2009

2008 (£m) 2009 (£m)

Revenue 54 52

Gross Profit 32 35

Operating Profit 3.5 4

Revenue from other Sources

12 0

Profit for Period 15.5 4

• What do you think the financial objectives of Standard Life PLC are?• Do you think the performance of Standard Life PLC has improved or

deteriorated between 2008-2009?

Income Statement

Definition:• A financial document that summarises a businesses

trading activity and expenses to show whether it has made a profit or a loss.

• Found in the annual report.

Income StatementDefinition:• A financial document that summarises a businesses trading

activity and expenses to show whether it has made a profit or a loss.

• Found in the annual report.

Income Statement of Ted Baker PLC for the 52 Weeks ending 27 January 2007

£000s £000s

Revenue 125,648

Cost Of Sales 51,986

Gross Profit 73,662

Operating Costs 53,612

Operating Profit 20,050

Income Tax Expense 5,634

Profit For The Period 14,416

Attributed to Equity Shareholders of Parent

Company 14,416

• Revenue – Cost of Sales• Cost of sales includes direct costs for

example raw materials, labour.Gross Profit

• Profit after all other expenses have been deducted, also referred to as net profit.

• Indirect costs are deducted eg. Rent

Operating Profit

• (Gross Profit/Sales) X 100Gross Profit Margins

• (Operating Profit/Sales) X 100• Gives a clearer indication of the businesses’

control over operating expenses.

Operating Profit Margins

Activities:

1) Using the above income statement, calculate the operating profit margin and gross profit margin for Ted Baker Plc.

2) What do these figures show you?3) How significant do you think the Ted Baker brand

name is in achieving the gross profit margin?

Activities:

1) Complete the below Income Statement of Ted Baker PLC for 2007.

2) Calculate the operating profit margin and gross profit margin for Ted Baker Plc.

3) Has Ted Baker become more profitable over time or less profitable?

4) What reasons may there be for this? Between 2007 and 2008 the minimum wage increased in the UK.

Profit Quality

Looks at how sustainable profits are.

What percentage is from routine day-to-day

activity as apposed to non-routine activity (selling off assets).

High Quality Vs Low Quality

High Quality• Profit which can be

repeated• Not reliant on one-off

profits• Shareholders can have

some confidence in the profit trend

Low Quality• Difficult to repeat• One-off profits usually

caused by sale of assets• Shareholders need to adjust

reported profit to assess what the likely profit is for next year.

Profit Utilisation

• How profit is being used.

• Whether it is being ploughed back into the business or distributed to shareholders.

Plenary

• Define income statements• Explain gross profit margin and operating

profit margin.• What does profit quality mean?• What factors may affect a decreasing

Operating Profit Margin over time?