8. Income Statements (P&L accounts)

8. Income Statements (P&L accounts)

1. Accounting statement showing s firm's sales revenue over a trading period and all the relevant costs generated to earn that revenue. PLC's use income statements, small firms use profit and loss accounts.

2. Who Wants to See the Income Statements?

   • Shareholders (assessing profitability)
   • Gov agencies (tax authorities require data on P&L to calculate corporation tax)
   • Suppliers (need to know financial position to establish their reliability, stability and creditworthiness)
   • Potential shareholders and bankers (commit funds?)

3. The Uses of Income Statements

   • Measure success of a business compared to previous year or another
   • Assess actual performance compared with expectations
   • Help obtain loans from banks
   • To enable owners and managers to plan ahead i.e. future investment

4. Measuring Profit

   • Profit = Revenue - Costs
   • Gross Profit
     • Measure of the difference between income (sales revenue) and the cost of manufacturing/ purchasing the products sold.
     • Can compare with other companies, maybe find cheaper supplier or boost prices?
   • Net Profit
     • /Operating Profit.
     • Net Profit = Gross Profit - (expenses + overheads)
     • Takes everything into account. If small net profit, business may need to control costs such as salaries/ distribution
   • Profit Quality

5. Determining Profit

6. Examining Income Statements

7. Public Limited Companies

8. Income Statements and the Law