The definition and purpose of the statement of comprehensive income

The statement of comprehensive income is a financial report that details a business's income and spending over a set period. It provides a clear picture of financial performance by showing how much money comes in and goes out.

The primary aim is to work out the profit at the end of the financial year, which is a 12-month trading period that may not match the calendar year, such as running from 1 October to 30 September. Profit represents the amount remaining after all costs are deducted from revenue.

Key components of the statement of comprehensive income

The statement includes various elements that track money flowing into and out of the business. These components help build a complete view of financial activity.

Revenue

Revenue is the income generated from selling goods or services. It excludes VAT (value added tax) since this tax is collected for the government and does not belong to the business.

Cost of sales

Cost of sales covers the direct costs involved in producing or acquiring goods for sale.

• For manufacturers, this includes raw materials and wages for factory staff.
• For retailers, it involves the cost of purchasing stock to resell.
• For service providers, it encompasses materials and direct labour costs linked to delivering the service.

Expenses

Expenses are the ongoing costs of running the business, divided into several categories.

Types of expenses:

• Administrative expenses - General overheads like office salaries, senior management costs, stationery, IT support, accountancy fees, and telephone charges.
• Other operating expenses - Additional costs not covered in administrative expenses, such as subscriptions, postage, and minor office supplies.
• Selling expenses - Costs directly tied to sales activities, including commissions for sales staff, advertising, distribution, and promotional materials.
• Finance costs - Interest payments on loans or borrowings.
• Finance income - Interest earned on savings or deposit accounts.

Taxation and profit distribution

Key terms:

• Income tax - Tax on profits paid by sole traders and partners in a partnership.
• Corporation tax - Tax on profits paid by limited companies.
• Distributed profit - Profit shared with owners, such as through dividends (payments to shareholders in a company).
• Retained profit - Profit kept within the business for future use, rather than distributed to owners.
• Normal profit - The minimum level of profit needed to keep the owner(s) interested in continuing the business.

Calculations for different types of profit

Profit is calculated at various stages in the statement of comprehensive income, showing how revenue is reduced by costs and expenses.

Gross profit

$\text{Gross profit}=\text{revenue}-\text{cost of sales}$

Where:

• Revenue = Income from sales (£)
• Cost of sales = Direct costs of producing or buying goods (£)

This measures profit before deducting general expenses.

Operating profit

$\text{Operating profit}=\text{gross profit}-\text{expenses}$

Where:

• Gross profit = Profit after cost of sales (£)
• Expenses = All operating costs, including administrative, selling, and other expenses (£)

This shows profit from core business activities before finance costs or income.

Other profit calculations

• Profit for the year - Operating profit minus finance costs (also known as net profit before tax).
• Profit for the year after tax - Profit after deducting all expenses, including taxation; often called the 'bottom line'.

Worked example - Calculating gross and operating profit

A retailer has revenue of £95,000 from sales, cost of sales amounting to £60,000, and total expenses of £22,000. Calculate the gross profit and operating profit.

Step 1: Identify the values

• Revenue = £95,000
• Cost of sales = £60,000
• Expenses = £22,000

Step 2: Calculate gross profit

$\text{Gross profit}=\pounds \mathrm{95,000}-\pounds \mathrm{60,000}=\pounds \mathrm{35,000}$

Step 3: Calculate operating profit

$\text{Operating profit}=\pounds \mathrm{35,000}-\pounds \mathrm{22,000}=\pounds \mathrm{13,000}$

Uses of the statement of comprehensive income

The statement helps stakeholders make informed decisions by providing insights into financial health.

Key applications of the statement:

• Guiding investment decisions - Shows profitability to help decide on investment levels.
• Analysing costs - Highlights increases in costs, allowing businesses to introduce controls.
• Forecasting future performance - Serves as a foundation for predicting trends and planning ahead.
• Comparing businesses - Enables investors to evaluate performance against other companies.

The importance of profit in business

Profit is essential for business sustainability and growth, influencing decisions and resource allocation.

Reasons why profit matters:

• Motivation for entrepreneurs - Encourages people to start businesses by providing a reward for risk and effort.
• Incentive for investment - Without profit, there would be little reason to commit time and money to business ventures.
• Influence on industry dynamics - Directs money towards expanding sectors and away from declining ones.
• Efficient resource use - Helps allocate economic resources more effectively across the economy.