IB Business Management SLTopic 3 — Final AccountsPaper 1 & 2Core skill~11 min read
Reading a Statement of Profit or Loss
One page, one year, one story: how much came in, what it cost, and what was left. Once you can walk down the ladder from revenue to retained profit without hesitating, half of Topic 3 becomes arithmetic you already know.
📚 What you need to know
The statement of profit or loss shows income and expenditure over a period, usually a year. It is also called the profit and loss account or income statement.
It has three parts: the trading account, the profit and loss account and the appropriation account.
Gross profit = sales revenue − cost of sales.
Profit before interest and tax = gross profit − expenses.
Then take off interest, then tax, to reach profit for the period.
Finally take off dividends to leave retained profit.
For a non-profit organisation the word “profit” becomes surplus, and there is usually no tax line.
The ladder from revenue to retained profit
Every statement of profit or loss is the same ladder. You start with everything customers paid you and take costs off in a fixed order. The order matters, because each rung answers a different question.
Learn the ladder in order. Examiners often give you every figure except one and ask you to work backwards up it.
The trading account
Cost of sales is what it cost to make or buy the things you actually sold — materials, components, stock bought in. Take it off revenue and you get gross profit: the money the product itself makes before running the business is paid for.
The profit and loss account
Now the overheads come off: rent, salaries, marketing, insurance, utilities. What is left is profit before interest and tax, the figure most ratios use. Then interest on borrowing, then tax, leaving profit for the period.
The appropriation account
The profit is divided. Some goes to the owners as dividends; the rest stays in the business as retained profit, which you met as an internal source of finance.
The four subtractions, in order
revenue − cost of sales − expenses − interest − tax = profit for the period
If gross profit is healthy but the final profit is thin, the product is fine and the running costs are the problem. If gross profit is already thin, the problem is the price you charge or what your materials cost. That one sentence turns a table of numbers into analysis.
Who reads it, and what they look for
A rise in profit is good news for shareholders and can be bad news for employees if it came from cutting staff. Say whose view you are taking.
Worked examples
WORKED EXAMPLE 1
Completing the statement [5 marks]
A company reports (in $000): sales revenue 420, cost of sales 168, expenses 145, interest 12, tax 19, dividends 30. Calculate gross profit, profit before interest and tax, profit for the period and retained profit.
Step 1: gross profit420 − 168 = $252Step 2: profit before interest and tax252 − 145 = $107Step 3: down through interest and tax107 − 12 = $95 before tax95 − 19 = $76 for the periodStep 4: after dividends76 − 30 = $46 retainedGP 252 | PBIT 107 | Profit 76 | Retained 46 ($000)keep the $000 label on every line — dropping it is the easiest mark to lose in the whole topic
WORKED EXAMPLE 2
Reading the story behind the numbers [6 marks]
A firm’s figures (in $000): last year revenue 400, gross profit 160, profit for the period 60. This year revenue 460, gross profit 175, profit for the period 48. Comment on performance.
Step 1: what improvedRevenue up 400 → 460, and gross profit up 160 → 175. More is being sold.
Step 2: what got worseProfit down 60 → 48 despite higher sales.Step 3: find where it leaked
Gross profit minus profit shows the costs below the top line:
Last year: 160 − 60 = 100. This year: 175 − 48 = 127.Overheads jumped by 27, wiping out the extra salesthe recommendation writes itself: the growth is real, so fix the expenses rather than chasing more revenue
💡 Exam tip
Learn the order of the ladder. Half of the marks are for putting the lines in the right sequence.
Brackets mean subtract. Show your subtractions, do not just write the answer.
Always state the units: $000, $m or raw figures, exactly as the question gives them.
If asked to comment, compare two things: this year against last year, or one line against another.
Use “profit before interest and tax” by name — it is the figure the profitability ratios need.
For a charity, write surplus instead of profit and expect no tax line.
⚠ Common mix-up
Gross profit called profit. Gross profit ignores every overhead the business has.
Putting expenses in cost of sales. Cost of sales is what went into the products sold; rent and salaries are expenses.
Forgetting dividends. Retained profit is what is left after owners are paid.
Treating the statement as cash. It records sales made, not money received.
Reading a rise in revenue as good news alone. Check whether profit followed it up.
Mixing up units. $0.4m and $400,000 are the same number; $400 is not.
Up next: Reading a Statement of Financial Position — the other account, which shows what the business owns and owes on one particular day.
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