Financial statements and ratios · GCSE Business

The income statement

An income statement shows a business's revenue, costs and profit over a period, usually a year.
Revenue − cost of sales = gross profit. Gross profit − operating expenses (and interest) = net profit.

Gross profit margin (%) = gross profit ÷ revenue × 100. Net profit margin (%) = net profit ÷ revenue × 100.
Example: revenue £200,000 and cost of sales £120,000 give gross profit of £80,000, a gross profit margin of 40%. After £50,000 of expenses, net profit is £30,000, a net profit margin of 15%.
Higher margins are usually better. Compare them over time and with competitors.

A statement of financial position (balance sheet) shows what a business owns (assets) and owes (liabilities) at a point in time.
Non-current assets include buildings and machinery. Current assets include cash, stock and money owed by customers. Current liabilities, due within a year, include overdrafts and money owed to suppliers. Non-current liabilities include long-term loans.

Owners, managers, investors and lenders use financial statements to judge performance, compare with competitors and earlier years, and decide whether to invest or lend.

Income statement: A financial statement showing revenue, costs and profit over a period.
Cost of sales: The direct cost of the goods a business has sold.
Gross profit margin: Gross profit as a percentage of revenue.
Net profit margin: Net profit as a percentage of revenue.
Expenses: Costs that aren't part of cost of sales, such as rent and salaries.
Assets: Things a business owns, such as machinery and cash.
Liabilities: Things a business owes, such as loans.
Statement of financial position: A statement of what a business owns and owes at a point in time.