0264 · 5.3.2Statement of profit or loss

Statement structure and profit

0:00Revenue is the income a business receives from selling goods or services. In turn, profit is total revenue minus total costs. A shop can increase its sales while the amount left after costs falls. Understanding that possibility helps an owner spot problems before making decisions about prices, spending or expansion. A statement of profit or loss is a financial statement that shows a business’s revenue, costs and profit or loss over a period of time, usually a year.

0:26It organises the figures into a clear sequence. Each stage answers a different question about the business’s performance. By the end of this video, you will understand that sequence, calculate missing figures and use the results to support decisions. The main features appear in this order: revenue, cost of sales, gross profit, expenses and profit. Start with the income earned from customers during the period. Then remove the cost associated with the goods sold.

0:50Finally, allow for the other costs of running the business to find the amount remaining. The period matters because every figure must cover the same length of time. A statement headed for the year shows the results across that year. A result for one month therefore compares that month's revenue with its costs. Check the heading and currency before using any figures. Cost of sales is the cost of producing or buying the goods that were sold.

1:12For a retailer, this includes the purchase cost of those goods. A clothing shop therefore matches the cost of the garments sold against the income earned from selling them. This gives a clearer picture of what those sales earned for the business. Gross profit is revenue minus cost of sales. It shows how much remains from sales after covering the cost of the goods sold. That remaining amount must help pay for running the wider business.

1:34A positive gross profit is therefore one stage towards the final result. Below gross profit sit the expenses. Expenses are the other costs of running the business, such as rent, salaries and advertising. They pay for premises, for managing operations and for attracting customers. Interest is the payment made for borrowing money. Interest is listed among the expenses, so it reduces the profit left for the owners. The final calculation is profit equals gross profit minus expenses.

2:03This works because cost of sales has already been deducted. Together, cost of sales and expenses account for the costs in our simple statement. A loss is when total costs are greater than total revenue, so a loss appears when expenses are greater than gross profit.

Worked example: Bramble Outfitters

2:16Bramble Outfitters sells clothing. Its statement shows revenue of two hundred thousand dollars and cost of sales of one hundred and twenty thousand dollars. Gross profit is eighty thousand dollars. Expenses are fifty thousand dollars, and profit is thirty thousand dollars. We can check how each stage fits together using the information behind these figures. Assume the business sold ten thousand garments at twenty dollars each during the year. Each garment sold cost twelve dollars to buy from its supplier.

2:43The other running costs for the year totalled fifty thousand dollars. Revenue equals selling price per unit multiplied by the number of units sold. Each of the ten thousand garments earns twenty dollars from a customer. Twenty dollars multiplied by ten thousand gives two hundred thousand dollars. Multiplication combines the income from all the garments sold during the year. For this retailer, cost of sales equals purchase cost per unit multiplied by units sold.

3:08Each garment sold cost twelve dollars to buy. Twelve dollars multiplied by ten thousand gives one hundred and twenty thousand dollars. This calculation assumes that every garment sold had the same purchase cost. Gross profit equals revenue minus cost of sales. Two hundred thousand dollars minus one hundred and twenty thousand dollars gives eighty thousand dollars. The business has covered the purchase cost of the clothing sold. Its remaining eighty thousand dollars must now cover the other running costs.

3:34Profit equals gross profit minus expenses. Eighty thousand dollars minus fifty thousand dollars gives thirty thousand dollars. All the costs shown in this simple statement have now been allowed for. The business earned thirty thousand dollars after covering them during the year.

Finding missing statement figures

3:49Missing figures become easier when you follow what each stage represents. Sometimes you work downwards through the statement by deducting costs. At other times, the amount remaining and one deduction are already known. Adding them together reconstructs the amount available before that deduction. Fernbank Supplies sells stationery. Its statement gives cost of sales of ninety-six thousand dollars and gross profit of sixty thousand dollars. Profit is eighteen thousand dollars, while revenue and expenses are missing.

4:15We can find both gaps by reasoning backwards from the amounts provided. Revenue must cover cost of sales and leave the gross profit shown. Sixty thousand dollars plus ninety-six thousand dollars gives revenue of one hundred and fifty-six thousand dollars. Expenses fill the gap between gross profit and profit. Sixty thousand dollars minus eighteen thousand dollars gives expenses of forty-two thousand dollars. Granite Components makes metal parts. Its revenue is one hundred and seventy-four thousand dollars, while gross profit is sixty-nine thousand dollars.

4:44Expenses are forty-five thousand dollars, and profit is twenty-four thousand dollars. The missing cost of sales is the amount deducted before reaching gross profit. Cost of sales equals revenue minus gross profit. One hundred and seventy-four thousand dollars minus sixty-nine thousand dollars gives one hundred and five thousand dollars. That figure fills the missing line. The position of the gap tells you which relationship to use.

Comparing performance across years

5:07Comparing periods helps reveal where performance changed. In Bramble Outfitters’ later year, revenue reaches two hundred and forty thousand dollars and cost of sales becomes one hundred and forty-five thousand dollars. Gross profit rises to ninety-five thousand dollars. Expenses reach eighty-five thousand dollars, so profit is only ten thousand dollars. Ninety-five thousand dollars minus eighty thousand dollars gives a gross profit increase of fifteen thousand dollars. Over the same years, expenses rose by thirty-five thousand dollars, because eighty-five thousand dollars minus fifty thousand dollars gives that amount.

5:38The extra expenses were larger than the improvement in gross profit. As a result, profit fell by twenty thousand dollars, since thirty thousand dollars minus ten thousand dollars gives twenty thousand dollars. The owner should investigate which expenses increased and what benefits they produced. For example, higher advertising spending needs to be considered alongside the extra sales it helped generate. Reducing spending that brings little benefit could improve the final result.

6:02Protecting useful expenditure matters too, because reliable service can encourage customers to return.

Branch decisions and recap

6:08A statement can also help compare branches over the same period. Assume Thistle Services repairs household appliances at a northern branch and a southern branch. Both statements use the same approach to classifying costs. The southern location also has unused appointment capacity and customers waiting to book. The northern branch earns revenue of ninety thousand dollars, with cost of sales of thirty-eight thousand dollars. Its gross profit is fifty-two thousand dollars.

6:32Expenses of forty-one thousand dollars leave profit of eleven thousand dollars. These figures show how its income passes through each stage. At the southern branch, revenue is seventy-five thousand dollars and cost of sales is twenty-nine thousand dollars. Gross profit reaches forty-six thousand dollars. After expenses of twenty-seven thousand dollars, nineteen thousand dollars of profit remains. This branch earns more after costs despite having lower revenue. Nineteen thousand dollars minus eleven thousand dollars gives a difference of eight thousand dollars.

7:02The southern branch earns eight thousand dollars more over the year. An exam-style question could ask you to justify which branch should receive priority for additional bookings. Justify means support a case with evidence or argument. I recommend giving the southern branch priority for additional bookings. It earns eight thousand dollars more profit, so its current operations produce the better financial result. Unused appointment capacity allows it to serve the customers waiting to book.

7:26The northern branch generates more revenue, but its higher expenses leave less profit, so it is the weaker choice. Extra bookings in the south should therefore add more profit for the business. When reading a statement, keep the meaning of each figure clear. Revenue measures income from sales, while profit shows what remains after costs. Deduct cost of sales once to reach gross profit, and then take away expenses to reach profit.

7:49Cash is the money a business holds as notes and coins and in its bank account. A statement of profit or loss measures financial performance across a period. Profit is not the same as cash, because the timing of customer payments affects the amount in the bank. A profitable business can therefore still be short of cash. Cash flow is explored in the video on the importance of cash and cash flow forecasts.

8:09For calculation questions, calculate means work out from given facts, figures or information. Write the relevant relationship, insert the amounts and show your working with dollars. For decisions, connect your choice to evidence from the statement and the business situation. Comparable periods and consistent cost classifications make those comparisons more useful. Revenue is the income a business receives from selling goods or services. Remember that cost of sales is the cost of producing or buying the goods that were sold.

8:37Gross profit is revenue minus cost of sales. These stages show what sales leave available to cover the wider business. Expenses are the other costs of running the business, such as rent, salaries and advertising. At the bottom of the statement, profit is total revenue minus total costs. You can also calculate it as gross profit minus expenses. Following that sequence helps you complete missing figures, explain changes and support better business decisions.