Updated: Feb 22
How to calculate and use information on revenue, cost and profits in income statements
1. Revenue - Total sales
2. Cost of sale - Total cost of items sold
3. Gross profit - Revenue after cost of sale. It provides information on the profit before expenses.
4. Expenses - Also known as overheads, they are considered as fixed cost that incurs even if there are no sales.
5. Profit before tax - This is the profit that will be taxed by the government. It is the profit that is used to measure the performance of the business as it projects actual profit from business decisions made by the management.
6. Corporate tax - Corporate tax is a form of income tax (direct taxes) that must be paid
by all operating businesses.
7. Profit after tax - Profit after tax is the amount that will be distributed to
shareholders/owners or kept as retained profits.
8. Distributed profits - These are earning from investment made by shareholders on the company or owners
9. Retained profits - Retained profits are an important component in the income statement as these amounts can be used for expansion purposes or for survival during an economic recession.
How to use components in income statement
By comparing gross profit and profits, you would be able to identify if profits was less due to high expenses or cost of sale. This would enable a management to find ways to reduce expenses if or if cost of sale should it be the cause of low profit.
Revenue are compared year-on-year to determine if sales have increased. It indicates if the firm have improved its performance
An increase in cost of sales could indicate an increase in raw materials used to produce output