A2 Business Studies Resource

1. Do Now - Quiz
What do you
remember about the
work we completed
last term?
Complete the quiz!

2. Using financial data to
measure and assess
performance

3. Learning Objectives
By the end of this lesson you should be able to:
1. Analyse how income statements are used to assess
performance and potential.
2. Understand the importance of profit utilisation and
profit quality.

4. Sources of financial data
Companies are required to produce an annual report –
but what does it contain and why produce it?
Income This measures the business' performance over a given period of time,
statement usually one year. It compares the income of the business against the
cost of goods or services and expenses incurred in earning that
revenue. It shows if a business has made a profit or loss.
Balance This is a snapshot of the business' assets (what it owns or is owed)
sheet and its liabilities (what it owes) on a particular day - usually the last day
of the financial year.
Cash flow This shows how the business has generated and disposed of cash and
statement liquid funds during the period under review. [note: AQA BUSS3 does
not require you to study cash flow statements]

5. Key users of financial data
60 second challenge….. Examples include:
Investors
List the key users of accounts. Lenders
Creditors
Customers
Employees
Government
Analysts
Media
But why would they want this
information?

6. Which club would you invest in?

7. What is an Income Statement
A historical record of the trading of a
business over a specific period (normally
one year)
Shows the profit or loss made by the
business – which is the difference between
the firm’s total income and its total costs

8. Example income statement
Profit
after
tax

9. Revenue, Cost of Sales
& Gross Profit
Category Explanation
Revenue Revenues (sales) during the period.
Cost of sales Direct costs of generating revenues go into “cost of sales”:
Cost of raw materials, components, goods bought for resale,
direct labour costs.
You did this in
Gross profit The difference between revenue and cost of sales. AS!
Gross Profit = Revenue – Cost of sales.
Gross Profit Margin (%) = Gross Profit/ Revenue x 100
• Useful measure showing how much profit is generated from
every £1 of revenue before overheads and other expenses are
taken into account.

10. Overheads and Operating Profit
Category Explanation
Distribution & Operating costs and expenses that are not directly related to
administration producing the goods or services are recorded here:
expenses Distribution costs (e.g. marketing, transport), administrative
expenses and overheads.
Operating profit A key measure of profit. Operating profit records how much
profit has been made from the trading activities of the
business.

11. Net profit
Finance Interest paid on bank and other borrowings, less interest
expenses income received on cash balances. A useful figure for
shareholders to assess how much profit is being used up by the
funding structure of the business.
Profit before tax Calculated as operating profit less finance expenses
Tax An estimate of the amount of corporation tax that is likely to be
payable on the recorded profit before tax.
Profit The amount of profit that is left after the tax has been accounted
attributable to for. Shareholders then decide how much of this is paid out to
shareholders them in dividends and how much is left in the business.

12. Practice
Complete the handout
and learn more about the
three parts of the Income
Statement.
You may need a
calculator.

13. Your worksheet

14. Your task…
Profit or Loss?
Fill in the gaps & calculate:
GROSS PROFT margin
NET PROFIT margin
Add comments and
observations to the ‘definitions’
section.

15. The answers…

16. The answers

17. The answers

18. What is profit quality?
Profit quality looks
at whether the
reported profit can
be sustained.
What are the benefits of
considering profit in the
short, medium and long
term?

19. High v Low Quality Profit
High quality profit Low quality profit
Profit which can be repeated Difficult to repeat
or sustained
Includes one-off profits (e.g.
Not reliant on one-off profits from the sale of surplus assets
or businesses)
Shareholders can have some
confidence in the profit trend Shareholders need to adjust
reported profit to assess what
the likely profit is for next year

20. What is profit utilisation?
The way in which profit
Consider: is being used, i.e. – put
Long and
short-term back into the business
objectives (retained profit) or
distributed to
shareholders.

21. Create a question!
Create a question to test another student in the
group.
Don’t forget to note the answer!

22. Re-cap Learning Objectives
You should now be able to :
1. Analyse how income statements are used to assess
performance and potential.
2. Understand the importance of profit utilisation and
profit quality.