Page 274 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

TEST YOURSELF
1 Explain the term ‘gross profit’.
2 State three reasons why profit is important to businesses.
3 Explain why profit differs from cash.

KEY TERM Income statements

Income statement: financial An income statement is a financial record of business revenue, costs and profit. It must
statement which records the be produced at least once a year by all businesses. It may be produced more frequently for
revenue, costs and profits of a
use by managers.
business for a given period
of time.
Uses of income statements
An income statement contains financial data which business stakeholder

groups may find useful. Both internal and external stakeholder groups use the

information when analysing business performance against their own objectives.
TOP TIP

The most important figure on an income statement for stakeholder groups is
You will not be asked in IGCSE

Business Studies to construct an profit. Why profit is important to different stakeholder groups is summarised in
income statement, but you must Table 21.3.
know how to interpret one.
Stakeholder Use
Owners/ ■ Profit after tax belongs to the owners/shareholders. They can see

EXPLORE!
shareholders how much they have earned for their investment in the business.
272
Research the business sections
Shareholders ■ Usually the higher the profit the higher the dividend payment.
of local and national newspapers

■ The market value of shares will often rise or fall depending on
and magazines, or use the
high or low profits earned.
internet to find examples of
financial data about businesses Employees ■ High profit increases job security.
in your country, for example the ■ Employees might expect to receive a good pay rise if a business is
latest profit figures. making good levels of profit.
Identify and explain how ■ Some businesses have profit-sharing schemes, so high profit
the data in these reports might means high share of profits for employees.
be used by any five diff erent
Lenders ■ They want to be sure that profit is enough to pay interest
stakeholder groups.
on loans.
■ Is the business earning enough profit to be able to repay loans
when due?
Government ■ The higher the profit the more tax the government will receive.
Stakeholders: see Chapter 5,
Suppliers ■ A firm that is profitable will continue to purchase raw materials
page 62.
and other supplies. This helps suppliers to earn profits.
Retained profit as a source
Managers ■ They can compare profit from one year to the next, or with
of finance: see Chapter 19,
competitor’s profits, to measure the performance of the business.
page 247.
■ Retained profit is an important source of finance for businesses.
Table 21.3 The usefulness of profit data to stakeholders
Activity 21.4 is about how different stakeholders might use fi nancial information

from the income statements of Muza Toys.