What does an income statement show?

the revenue, costs and profit of a business over a period. It records how the profit for the period was made.

Revenue is $50 000 and cost of sales is $32 000. What is the gross profit?

$18 000. 50 000 − 32 000 = $18 000.

Gross profit is $40 000 and expenses are $28 000. What is the profit?

$12 000. 40 000 − 28 000 = $12 000.

Which is an expense, not a cost of sales, for a shoe shop?

the rent of the shop. Rent is paid whatever is sold.

profit kept in the business after tax and dividends. It is kept to finance the business.

Profit and the income statement · Edexcel IGCSE Business

In plain words

Profit is what is left from sales after all the costs have been paid. It is the reward for the risk the owners took, and the main source of money for the business to grow.

The income statement is the document that shows how the profit for the year was arrived at, step by step.

5 things to know

An income statement shows a business's revenue, costs and profit over a period of time, usually a year.
Gross profit = revenue − cost of sales. The cost of sales is the cost of the goods that were sold.
Profit = gross profit − expenses. Expenses are the other costs of running the business: rent, wages, advertising. This figure is also called operating profit.
Retained profit is what is left after tax has been paid and dividends given to the owners. It is kept in the business.
Profit matters because it rewards the owners for taking risks, pays for expansion, attracts investors and shows how well the business is doing.

Worked example

A shop has revenue of $200 000. Its cost of sales is $120 000 and its expenses are $50 000. Find the gross profit and the profit.

Gross profit = revenue − cost of sales = 200 000 − 120 000 = $80 000.
Profit = gross profit − expenses = 80 000 − 50 000.
Profit = $30 000.

Tips and tricks

Gross profit comes first and is always the bigger of the two. If your profit is larger than your gross profit, the expenses have been added when they should have been taken away.
An income statement covers a period of time. It is a film of the year, where the statement of financial position is a photograph of one day.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Profit and the income statement: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

What does an income statement show?
- what a business owns and owes on one day
- the revenue, costs and profit of a business over a period (the answer)
- the cash expected in future months
- the number of employees
It records how the profit for the period was made.
Revenue is $50 000 and cost of sales is $32 000. What is the gross profit?
- $82 000
- $18 000 (the answer)
- $32 000
- $50 000
50 000 − 32 000 = $18 000.
Gross profit is $40 000 and expenses are $28 000. What is the profit?
- $68 000
- $40 000
- $12 000 (the answer)
- $28 000
40 000 − 28 000 = $12 000.
Which is an expense, not a cost of sales, for a shoe shop?
- the shoes it bought to sell
- the rent of the shop (the answer)
- the boxes the shoes came in from the maker
- the stock of trainers
Rent is paid whatever is sold.
Retained profit is
- profit paid out to shareholders
- profit before any costs are deducted
- profit kept in the business after tax and dividends (the answer)
- the same as revenue
It is kept to finance the business.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

Profit and the income statement

Edexcel International GCSE Business 4BS1 · 8 marks · papermunch.org

Name ______________________________ Date ______________

State the formula for gross profit.[2]
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Gross profit = revenue − cost of sales.
I got this one
A business has revenue of $90 000, cost of sales of $54 000 and expenses of $21 000. Calculate its gross profit and its profit.[3]
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Gross profit = 90 000 − 54 000 = $36 000. Profit = 36 000 − 21 000 = $15 000.
I got this one
Explain two reasons why profit is important to a private sector business.[3]
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It is the reward to the owners for risking their money. Profit that is retained can be used to pay for new equipment and expansion, without borrowing.
I got this one

Answers: Profit and the income statement

1. Gross profit = revenue − cost of sales.
2. Gross profit = 90 000 − 54 000 = $36 000. Profit = 36 000 − 21 000 = $15 000.
3. It is the reward to the owners for risking their money. Profit that is retained can be used to pay for new equipment and expansion, without borrowing.