Page 270 - Cambridge IGCSE Business Studies

21 Income statements

Introduction

The main objective of all private sector businesses is to earn a profit.
Objectives In this chapter you will learn how profit is made and the important diff erence

between profit and cash. You will look at the main features of an income statement
In this chapter you will
and how the information it contains is used by the business’s stakeholders.
learn about:
■ the importance of profit
■ how profit is calculated What is profit?

■ the difference between profit

Profit is the difference between revenue and total costs.
and cash
■ income statements.
Profit

Revenue

KEY TERMS
Total costs
268 Gross profit: the diff erence
between revenue and cost
of sales.
Profit: the diff erence between
revenue and total costs. Figure 21.1 Profit = revenue – total costs

There are three types of profi t:

■ Gross profit – the difference between the revenue earned from selling products and
Retained profit: see the cost of making those products.
Chapter 19, page 247.

■ Profit – the difference between the revenue from sales and total costs or
the difference between gross profit and expenses. Profit used to be called

‘net profit’.
■ Retained profit – the owners of a profitable business may decide to reinvest some
Total cost: see Chapter 16, of the profits in the business.
page 215.
How a profit is made

A business earns a profit by selling its products to customers at a price which is
KEY TERMS
higher than the total cost of making and supplying those products.

Total cost: costs of sales plus Th e profit formula is:
expenses.
Profi t = revenue − total costs
Revenue: the amount earned

from the sale of products. The total amount of money a business earns from selling its products is called
revenue.