10.1 Financial Statements – Statement of Profit or Loss
What is it?
Think of the Statement of Profit or Loss as a financial diary that records how much money a company earns and spends over a specific period (usually a year). It tells you whether the company made a profit (more money in than out) or a loss (more money out than in). 📖💰
Why do we need it?
- Shows profitability – can the company pay its bills and grow?
- Helps investors decide if they want to buy shares.
- Guides management on where to cut costs or invest more.
- Required by law for most businesses to be transparent. 📜
Key Parts of the Statement
| Section | What it shows |
|---|
| Revenue | Money earned from sales. |
| Cost of Goods Sold (COGS) | Direct costs to produce goods sold. |
| Gross Profit | Revenue – COGS. |
| Operating Expenses | Salaries, rent, marketing, etc. |
| Operating Profit (EBIT) | Gross Profit – Operating Expenses. |
| Other Income/Expenses | Interest, dividends, one‑off items. |
| Profit Before Tax | Operating Profit + Other Income – Other Expenses. |
| Tax | Government tax on profit. |
| Net Profit (or Loss) | Profit Before Tax – Tax. |
Reading the Statement – A Step‑by‑Step Analogy
- Start with Revenue – imagine all the money you get from selling your favourite sneakers.
- Subtract COGS – the cost of the sneakers themselves.
- The result is Gross Profit – the money left after buying the sneakers.
- Deduct Operating Expenses – rent for your shop, electricity, wages.
- You now have Operating Profit – the real earnings from running the shop.
- Add or subtract Other Income/Expenses – maybe you earned a small bonus or paid a fine.
- Subtract Tax – the government’s share.
- The final number is Net Profit – the money you can keep or reinvest. 🎉
Quick Example (Numbers in £)
| Item | Amount (£) |
|---|
| Revenue | 120,000 |
| COGS | 70,000 |
| Gross Profit | 50,000 |
| Operating Expenses | 30,000 |
| Operating Profit (EBIT) | 20,000 |
| Other Income | 2,000 |
| Other Expenses | 1,000 |
| Profit Before Tax | 21,000 |
| Tax (20%) | 4,200 |
| Net Profit | 16,800 |
Result: The company earned £16,800 after all costs and taxes.
Exam Tips 📚
- Always follow the order of the statement – missing a step can change the final profit.
- Check that tax is applied to profit before tax, not to revenue.
- Remember that net profit can be negative – a loss.
- Use the formula: Net Profit = (Revenue – COGS – Operating Expenses + Other Income – Other Expenses) × (1 – Tax Rate)
- When given a set of numbers, sketch the statement first to avoid mistakes.
Quick Quiz
Suppose a company has:
- Revenue: £200,000
- COGS: £120,000
- Operating Expenses: £50,000
- Other Income: £5,000
- Tax rate: 25%
What is the Net Profit?
Answer: £12,500 (calculate step by step to confirm).