the impact on the statement of profit or loss of a given change

10.1 Financial Statements – Statement of Profit or Loss

📊 What is the Statement of Profit or Loss?

It shows how a company’s revenue turns into profit after deducting all costs. Think of it as a recipe: ingredients (revenues) + cooking costs (expenses) = final dish (profit).

Key Sections of the Statement

  • Revenue (Sales)

  • Cost of Sales (COGS)

  • Gross Profit

  • Operating Expenses (SG&A)

  • Operating Profit (EBIT)

  • Finance Costs (interest, etc.)

  • Profit Before Tax

  • Tax Expense

  • Net Profit

How a Change Affects the Statement

Let’s walk through a simple example.

Scenario: A company sells gadgets.



Initial figures (in £k):

ItemAmount (£k)
Revenue1,200
Cost of Sales600
Gross Profit600
Operating Expenses200
Operating Profit400
Finance Costs50
Profit Before Tax350
Tax (30%)105
Net Profit245

Now, let’s apply a change and see the ripple effect.



Change 1: Increase in Revenue by 10%


New Revenue = £1,200 × 1.10 = £1,320



Change 2: Cost of Sales rises by 5%


New COGS = £600 × 1.05 = £630



Change 3: Operating Expenses stay the same



Change 4: Finance Costs increase by £10k


New Finance Costs = £50 + £10 = £60



Change 5: Tax rate remains 30%

ItemOriginal (£k)New (£k)Effect (£k)
Revenue1,2001,320+120
COGS600630-30
Gross Profit600690+90
Operating Expenses2002000
Operating Profit400490+90
Finance Costs5060-10
Profit Before Tax350430+80
Tax (30%)105129-24
Net Profit245301+56

Key Takeaway:


• Revenue ↑ → Gross Profit ↑ → Operating Profit ↑ → Net Profit ↑


• Cost of Sales ↑ → Gross Profit ↓ → Net Profit ↓


• Finance Costs ↑ → Profit Before Tax ↓ → Net Profit ↓


• Tax Rate ↑ → Net Profit ↓ (but proportional to profit before tax)


💡 Remember: every line item is linked – a change in one line cascades through the rest.

Exam Tips Box

  • 📌 Identify the type of change (revenue, cost, expense, tax, etc.).

  • 📌 Use the flow of the statement – changes affect the line below them.

  • 📌 Show calculations clearly – include both the new figure and the effect.

  • 📌 Remember that tax is applied to profit before tax, not to revenue.

  • 📌 If a change is one‑time (e.g., a sale of an asset), treat it as a separate line under profit before tax.

  • 📌 Practice with multiple scenarios – mix changes to test your understanding.

Quick Quiz

  1. What happens to the net profit if operating expenses increase by £50k while all other items remain unchanged?

  2. If the company’s tax rate drops from 30% to 25%, how will net profit change if profit before tax is £400k?

  3. Explain the impact on the statement if a company sells an old machine for £20k, with a carrying amount of £5k.