IB Business and Management ACCOUNTS & FINANCE 3.5 The Income Statement

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IB Business and Management ACCOUNTS & FINANCE: 3.5 Financial Accounts - The Income Statement

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IB Business and Management .com IB Business and Management T he IB Diploma Business and Management course delivered IN STYLE , ONLINE . ©

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z Financial accounts 3.5

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z The profit & loss account The main purpose of this set of accounts is to show the amount of profit or loss that a business made during a trading period Profit & loss account for ABC Ltd for the year ended 31 May 20** ($’000) Sales revenue *** Cost of goods sold *** Gross profit *** expenses *** Net profit before interest and tax *** Interest *** Tax *** Net profit after interest and tax *** dividends *** Retained profit *** Trading account Profit & loss account Appropriations account When given a profit & loss account it's likely that only a few changes or calculations will be required. in the exam you will not have to prepare a full set of accounts gross profit & net profit margin s are calculated as a percentage of sales

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Sales revenue ??? Cost of goods sold 200 Gross profit 250 expenses ??? Net profit before interest and tax 90 Interest 15 Tax 20 Net profit after interest and tax ??? dividends 30 Retained profit ??? z Profit & loss account for burton inc ® for the year ended 31 march 2010 ($’000) 450 160 55 25

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z Exam question May 2010 Calculate the missing values for x for 2009 & 2010 Sales revenue 2800 Cost of goods sold 891 Gross profit x expenses x Net profit before interest and tax 644 Interest 34 Tax 149 2009 1909 3123 x 2131 1453 x 90 156 2010 1265 992 678 Case study Q: 3.5.4, p. 397

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z Exam question Use the info provided to prepare an income statement Sales revenue Cost of goods sold Gross profit Overhead expenses Net profit before interest and tax Interest Tax 2012 Net profit after interest and tax dividends Retained profit Dividends: $60 000 Cost of sales: $250 000 Overheads: $100 000 Sales: $500 000 Company tax: @20% Interest paid: $50 000 500 000 (250 000) 250 000 (100 000) 150 000 (50 000) (20 000) 80 000 (60 000) 20 000 Trading Account Profit & Loss Account Appropriation

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z Exam question Use the info provided to prepare a trading and profit & loss account Sales revenue Cost of goods sold Gross profit Overhead expenses Net profit before interest and tax Interest Tax 2012 Net profit after interest and tax For each month in 2012: the shop’s sales averaged $80 000, The cost of goods sold was 75% of sales revenue, The indirect costs were constant @ $10 000 , monthly interest on long-term loan $5 000 , company tax @ 15% 960 000 (720 000) 240 000 (120 000) 120 000 (60 000) (9 000) 51 000 Trading Account Profit & Loss Account Van was purchased in February for $40 000

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z Profit & loss Benefits & limitations advantages disadvantages The profit & loss is important as it shows the profit (if any) that is generated after all costs (such as advertising, utility bills and salaries) are accounted for.

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z Profit & loss Benefits & limitations advantages disadvantages Shows the historical performance of the firm rather than what’s likely to happen in the future. (from the data Trends can still be forecasted) Window dressing (legal manipulation of the accounts to make them look financially more attractive) can take place; E.g., a sale of an asset may be included in non-operating income & ↑ profits

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