the impact on the statement of profit or loss of a given change
10.1 Financial Statements – Statement of Profit or Loss
📊 What is the Statement of Profit or Loss? It shows how a company’s revenue turns into profit after deducting all costs. Think of it as a recipe: ingredients (revenues) + cooking costs (expenses) = final dish (profit).
Key Sections of the Statement
- Revenue (Sales)
- Cost of Sales (COGS)
- Gross Profit
- Operating Expenses (SG&A)
- Operating Profit (EBIT)
- Finance Costs (interest, etc.)
- Profit Before Tax
- Tax Expense
- Net Profit
How a Change Affects the Statement
Let’s walk through a simple example.
Scenario: A company sells gadgets.
Initial figures (in £k):
| Item | Amount (£k) |
|---|---|
| Revenue | 1,200 |
| Cost of Sales | 600 |
| Gross Profit | 600 |
| Operating Expenses | 200 |
| Operating Profit | 400 |
| Finance Costs | 50 |
| Profit Before Tax | 350 |
| Tax (30%) | 105 |
| Net Profit | 245 |
Now, let’s apply a change and see the ripple effect.
Change 1: Increase in Revenue by 10%
New Revenue = £1,200 × 1.10 = £1,320
Change 2: Cost of Sales rises by 5%
New COGS = £600 × 1.05 = £630
Change 3: Operating Expenses stay the same
Change 4: Finance Costs increase by £10k
New Finance Costs = £50 + £10 = £60
Change 5: Tax rate remains 30%
| Item | Original (£k) | New (£k) | Effect (£k) |
|---|---|---|---|
| Revenue | 1,200 | 1,320 | +120 |
| COGS | 600 | 630 | -30 |
| Gross Profit | 600 | 690 | +90 |
| Operating Expenses | 200 | 200 | 0 |
| Operating Profit | 400 | 490 | +90 |
| Finance Costs | 50 | 60 | -10 |
| Profit Before Tax | 350 | 430 | +80 |
| Tax (30%) | 105 | 129 | -24 |
| Net Profit | 245 | 301 | +56 |
Key Takeaway:
• Revenue ↑ → Gross Profit ↑ → Operating Profit ↑ → Net Profit ↑
• Cost of Sales ↑ → Gross Profit ↓ → Net Profit ↓
• Finance Costs ↑ → Profit Before Tax ↓ → Net Profit ↓
• Tax Rate ↑ → Net Profit ↓ (but proportional to profit before tax)
💡 Remember: every line item is linked – a change in one line cascades through the rest.
Exam Tips Box
- 📌 Identify the type of change (revenue, cost, expense, tax, etc.).
- 📌 Use the flow of the statement – changes affect the line below them.
- 📌 Show calculations clearly – include both the new figure and the effect.
- 📌 Remember that tax is applied to profit before tax, not to revenue.
- 📌 If a change is one‑time (e.g., a sale of an asset), treat it as a separate line under profit before tax.
- 📌 Practice with multiple scenarios – mix changes to test your understanding.
Quick Quiz
- What happens to the net profit if operating expenses increase by £50k while all other items remain unchanged?
- If the company’s tax rate drops from 30% to 25%, how will net profit change if profit before tax is £400k?
- Explain the impact on the statement if a company sells an old machine for £20k, with a carrying amount of £5k.
Revision
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