Understanding Business Profitability and Income Statements

The concept of business profitability, illustrated through Mr. Seow's iPhone selling business, is explained in detail. The calculation of profit considering costs like rent and salaries is demonstrated. Gross profit, net profit, and their significance in measuring business success are discussed along with examples. Additionally, Income Statements and the components including sales revenue, gross profit, other income, and expenses are explored in the context of evaluating business performance.

• Business Profitability
• Income Statements
• Gross Profit
• Net Profit
• Financial Analysis

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1. Measures the profitability of a business for a period of time. Profit is not the same as cash. 1

2. Mr Seow sells iPhones for a living. Buys iPhone for $400 Sells iPhone for $1,000 What is his profit if he sells 100 phones? He also needs to pay rent $15,000 and salary of his helpers $3,000 What is his profit given this information? Does it matter which profit he reports? 2

3. Gross profit Sales : $1,000 x 100 = $100,000 Cost of sales: $400 x 100 = $40,000 Gross profit: $100,000 - $40,000 = $60,000 Net profit Expenses: $15,000 + $3,000 = $18,000 Net profit: $60,000 - $18,000 = $42,000 3

4. Gross profit measures the ability of a business to sell its goods higher than its cost of sales. In trading portion of income statement Profit / (loss) for the period is the final and overall indicator of how profitable a business is. In profit/ loss portion of income statement 4

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6. Mr Seow Income Statement for year ended 31 Dec Income Statement for year ended 31 Dec 2013 2013 $ $ Sales Revenue Less Sales Return Net Sales Revenue Less Cost of sales Gross Profit Add: Other Income Total of Gross Profit and Other income Less: Expenses Profit for the year 6

7. Mr Seow Income Statement for year ended 31 Dec Income Statement for year ended 31 Dec 2013 2013 $ $ Sales Revenue Less: Sales Return Net Sales Revenue 100 000 Trading portion - 100 000 Less: Cost of sales (40 000) Gross Profit 60 000 Add: Other Income 7 Total of Gross Profit and Other income

8. Complete Q1 (Shaun Stationery) and Q2 (Bob Builders) of the Income Statement Worksheet 8