Profit and Loss Essay
Profit and Loss
A profit and loss account is something businesses use to show them their revenue, costs and profits for that certain year, therefore showing the total amount of profit that the business has made that year, it is extremely important for the business, in particular for the accounts department who will refer to the profit and loss account a lot. This is because it clearly lays out what the business has spent, and what the business has brought in, it is easy for the business to identify any problems involving finance, and these problems can be solved.
Sales Revenue is all of the money which is coming into the business as a result of them selling their products and services, this figure is from purely sales, nothing is taken away from sales revenue. I am going to use Whitbread’s profit and loss account to show examples of sales revenue, their sales revenue for the year 2002/3 was £1,794.1m and £2,014.3m for the year 2001/2, this figure tells the business that their turnover has decreased in the past year, this could be for a variety of different reasons, of them is that the business had slightly more market share in 2001/2, however since than similar businesses have moved into the market and customers interests has been attracted towards those. Also, the business in itself may have decreased in quality, customers may not be as happy with the business as they were in the previous year and therefore have chose to visit other companies as a result of this.
The cost of sales is how much it has cost the business to make a product/service, for example, a company selling jam, their cost of sales would be how much it has cost them to produce the jars of jam, this would be the ingredients and jars. For 2001/2, the cost of sales are at a loss of £1.5480.0m, for 2002/3 they stand at a loss of £1,353.1m, therefore the cost of sales were high for the year 2001/2. Reasons for which they cost of sales decreasing could be that the business is now not wasting as many raw materials and only using what they need. Whitbread’s cost of sales could be paying suppliers of places such as Beefeater’s for the products which they produce.
Raw materials are materials which the business uses in order to produce a product, for example, a Pizza shop will need to import raw materials such as flour, cheese, tomatoes and pepperoni, these raw materials are they created into a finished product, in this case, the pizza.
Opening and closing stock is to do with stock and the financial year, how much stock the company has at the start of their financial year, and how much they have at the end, this way the business can look at how successful a product has been throughout the year.
Expenditure in a business is what it is costing them to keep the business running, without these things the business would not be able to keep running, these are known as ongoing costs. There are a large variety of expenditure costs, for example:
-employee costs -repairs -interest -administration -distribution costs -etc
Looking at Whitbread’s accounts, in 2001/2, their expenditure was £389.9m and for 2002/3 was £203.9m. In 2001, Whitbread’s spent £25m on ‘restructuring costs’, meaning this money was spent on ways ti improve the business, new technology may have been purchased so the business does not need to spend money on other expenses.
Depreciation is when an asset, for example a car, loses value over time, a car bought in 2001, will be worth less in 2002, this is because new models will have been launched and therefore customers will prefer these. On the profit and loss account, depreciation is put under expenses. In 2001/2 deprecation for Whitbreads was 3.9m, and for 2002/3 was £7.8m. Therefore depreciation was much high during 2002/3, the reason for this is probably the fact that during the ‘restriction’ stages, the company has purchased new technology which has now decreased in value
Taxation is known as the corporation tax which has to be paid by all limited companies, it is taken from their profits, and is usually a cut of them, this goes is paid to the government, obviously every company’s taxation is different. Whitbread’s taxation in 2001/2 was £59.4m, for the year 2002/3 it stands at £50.0m., therefore taxsation was around £5.9.4m higher in 2001/2, this is because this year the business had a slightly higher sales turnover, meaning the taxation is higher.
Gross profit is all profit made from the business, including what it has cost the business to keep running i.e. expenses.. This means that gorss profit is sales revenue, minus cost of sales, this figure creates gross profit.
Sales Revenue – Cost of sales = Gross Profit
Gross profit during 2001/2 stands at £466.3m, and for the year 2002/3 are £441.0m. This tells us that gross profit was slightly higher in 2001/2, this is because there was a different number of sales in this year that the other. However, the gross profit figure may also be different because the company is not bringing in as many sales as in other years. The business must be aware that the gross profit is not a true indication of their current performance because it does not take into account
Net profit is the businesses total profit for that financial year, in order to figure out the net profit, the business must first work out the gross profit, then take away business expenses, giving the final profit figure. For the year 2001/2, the net profit was a loss of £52.4m, however in 2002/3 the businesses net profit was £152.8m, meaning the business made a higher net profit in 2002/3. The reason for this is probably the fact that the business under went a lot of reconstruction. The net profit gives Whitbread’s a clear indication on how they are performing as a company.
Looking at Whitbread’s accounts, I would say that as a business, they have clearly made excellent improvements since their reconstruction, they have gone from making a large loss, to making a large profit in just a year. Therefore I would defiantly invest in Whitbread’s, however I would prefer to see the accounts of Whitbread over the next few years to make sure customers haven’t lost interest, in a few years time, Whitbread’s may need to make more improvements to its business to make sure they are keeping up to date.