Calculating Costs, Revenues and Profits (P&L Account)
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Calculating Costs, Revenues and Profits (P&L Account) Method and Worked Example Profit is the surplus of total revenue that a business earns from selling goods and services over the total costs incurred in selling those goods and services. Businesses produce a Profit & Loss Account (Income Statement), which shows the revenue and costs in relation to trading activities over a period of time (usually a year). Total Revenue is calculated by multiplying the selling price per unit by the quantity sold. For example, if a business trading in calendars sells 120 000 calendars at £4.99 each, then their Total Revenue will be £598 800 (120 000 × £4.99). There are two types of profit that you need to be able to calculate: gross profit and net profit. These are: Gross Profit = Revenue – Cost of Sales Net Profit = Gross Profit – Expenses An example of the traditional format of a Profit & Loss Account (Income Statement) is shown below: Sales Revenue £50 000 Cost of Sales £30 000 Gross Profit £20 000 Expenses £15 000 Net Profit £5 000 Gross Profit = Sales Revenue – Cost of Sales £50 000 – £30 000 = £20 000 Net Profit = Gross Profit – Expenses £20 000 – £15 000 = £5 000 Costs of Sales involves a separate calculation, which is shown in the adapted Profit & Loss Account (Income Statement) below: Sales Revenue £50 000 Cost of Sales Opening Stock £10 000 Purchases £25 000 Closing Stock £5 000 £30 000 Gross Profit £20 000 Expenses £15 000 Net Profit £5 000 Cost of Sales is calculated as follows Opening Stock + Purchases - Closing Stock £10 000 + £25 000 - £5 000 Question 1 Junaid sells freshly made sandwiches from his mobile food van, which he sells for £1.75. The table below shows how many sandwiches Junaid sells in one week of trading (Junaid does not work weekends). Monday Tuesday Wednesday Thursday Friday Number of 45 43 39 48 55 sandwiches sold Calculate Junaid’s total revenue Question 2 Tracy sells gift sets of chocolates, candles and toiletries on a popular and well known social media site. Tracy has traded for a year and has the following information about her trading activities: Sales Revenue Cost of Sales £56 750 Gross Profit £35 500 Expenses £22 550 Net Profit £9 950 Use the information in the table above to calculate Tracy’s Sales Revenue. Question 3 Sanjay Gill owns a café in Swindon. In 2016, Sanjay produced the following Profit & Loss Account (Income Statement). Use the information below to calculate Sanjay’s gross profit and net profit. Sales Revenue £125 000 Cost of Sales £72 000 Gross Profit Expenses £41 000 Net Profit Question 4 Sonia Massey owns a gift shop in Manchester. Sonia’s Profit & Loss Account (Income Statement) for the 12 months ending November 2016 is shown below. Use the information below to calculate Sonia’s cost of sales and expenses. Sales Revenue £175 000 Cost of Sales Gross Profit £79 000 Expenses Net Profit £20 000 Question 5 Ben Wilkinson owns a small business selling cosmetics and perfumes on a website called iBuy. He has produced the following Profit & Loss Account (Income Statement) for the last 12 months. Ben needs help in calculating his Cost of Sales, Gross Profit and Net Profit. Sales Revenue £73 000 Cost of Sales Opening Stock £13 000 Purchases £22 000 Closing Stock £3 000 ? Gross Profit ? Expenses £15 300 Net Profit ? Question 6 Agatha Furnishings Ltd manufactures and sells dining tables and garden tables. Martin and Fiona are directors of the company, which has been trading for the past three years. The company’s Profit & Loss Accounts (Income Statements), since the company was incorporated, are shown below. a) Using the information in the table below, calculate the following: 2014 2015 2016 Sales Revenue £37 500 £41 300 £42 350 Cost of Sales £13 725 ? £15 750 Gross Profit £23 775 £26 075 ? Wages £5 200 £5 500 £6 750 Rent £4 000 £4 250 £4 500 Rates £2 500 £2 500 £2 500 Other Expenses £4 250 £4 500 £4 550 Total Expenses £15 950 £16 750 ? Net Profit ? £9 325 £8 300 • Cost of Sales (2015) • Gross Profit (2016) • Total Expenses (2016) • Net Profit (2014) b) What year had the lowest net profit? c) What is happening to net profit between 2014 and 2016? d) Which expense does not change in value in the period 2014 – 2016? Answers Question 1 £402.50 Question 2 £92 250 Question 3 Gross Profit: £53 000 Net Profit: £12 000 Question 4 Cost of Sales: £96 000 Expenses: £59 000 Question 5 Cost of Sales: £32 000 Gross Profit: £41 000 Net Profit: £25 700 Question 6 a) Cost of Sales (2015): £15 225 Gross Profit (2016): £26 600 Total Expenses (2016): £18 300 Net Profit (2014): £7 825 b) 2014 c) Decreasing d) Rates.