Reading and discussion

TASK 1. Read the text and write out the main items of the profit and loss statement mentioned in it Answer the questions:

1. What is the difference between the income statements of trade and service firms?

2 What is the difference between the terms `costs<sup>`</sup> and 'expenses?

3. How are usually income and expense statements prepared?

THE INCOME STATEMENT

The profit and loss (income) statement should really be called the income and expense statement because it shows both of these categories for a period of time. These statements are always prepared as formal statements for a whole year; many firms prepare them monthly, quarterly, or even weekly.

The income statement is necessary for the decision-making process because it tells the owner how the business is meeting its income and expense goals. The analysis of how the firm is operating makes it possible to take adjustments by reducing expenses or increasing income. And business income begins with sales.

The profit and loss account is basically a statement of sales and costs. A firm cannot survive without income from the sale of the products or services it is in business to provide. The most attractive product in the world is of no value to the firm unless someone pays for it. Once this money is brought into the business, the gross margin (gross profit) can be calculated by subtracting the cost of the goods sold from sales income. The lowest possible output at which a business can operate without loosing money and without getting profit is called the break-even point.

There isn't a standardized profit and loss account for managers in all types of business. The content will entirely depend on what is felt to be both useful to the reader and economical to produce. And they will be often different prepared for external publication and for taxation authorities or for management. The basis for the first two purposes is compliance with the appropriate legal requirements.

The profit and loss statement for firms that sell a product from inventory can be prepared using the following five basic steps:

Step 1.List the sales income (revenues) received.

Step 2. Subtract the cost of goods sold.

Step 3. The result is the gross margin.

Step 4. Subtract the operating expenses.

Step 5.The result is the net profit for the period measured.

The costs of the goods sold are deducted from the sales value of the goods sold to produce the gross profit. The gross profit is reduced by the cost of running administration, marketing and other departments to produce the net profit before tax. The account then goes on to show how much of the net profit before tax is earmarked for taxation obligations; how much of the net profit after tax is for the shareholders by way of dividends; the remainder being retained in the business as an additional source of finance.

The income statement for service firms such as banks, laundries, insurance agencies, ticket agents, hair stylists, and repair services that do not sell products from inventory usually does not include Step 2 above. Instead of it, the formula is:

Step 1.List the sales income (revenues) received.

Step 2. Subtract the operating expenses.

Step 3. The result is the net profit for the period measured.

Without inventory to sell the cost of goods entry is omitted and operating expense is subtracted from sales income to produce a net profit figure.

To prepare the profit and loss statement, all the accounts that record income and expenses are summarized for the fiscal period being studied. When the formal income statement is prepared, the accounts are closed as of the date of the statement, and the resulting profit and loss is then transferred to the owner's net worth account on the balance sheet.

The income statement is truly a valuable document when a manager is deciding how to improve his business income or reduce expenses. He should consider the following questions:

1. Is the business markup high or low compared to that of successful firms in the same business?

2. Is the cost of goods sold high or low?

3. Is the inventory adequate for the volume of sales?

4. Were sales lost because of stockouts (not having products customers wanted)?

5. Is the inventory on hand still salable, or is it out of date?

6. Are the firm's operating costs similar to those of efficient firms selling the same products?

These or other important questions can be answered by comparing the firm's operations to the operations of similar businesses.

COMPREHENSION

TASK 1. Read the text and complete the following statements according to the text.

1. To produce products or services____.

2. The income statement shows the categories of______.

3. The sales figure is_____.

4. To operate profitably the sales___________.

5. The income statement is__________.

6. It necessary for_______.

7. The adjustments can be made by________.

8. The gross margin is the result of_________.

9. The content of the profit and loss statement depends on_________.

10. The gross profit without operating expenses builds up_________.

11 .Net profit is distributed between_________.

12.The reminder retains as__________

TASK 2. Answer the following questions on the text.

1. How is profit and loss generally defined?

2. How is the profit and loss statement usually prepared?

3. Is there a standardized income statement?

4. What costs can you refer to operating expenses?

5. What kinds of net profit do you know?

6. What is revenue?

TASK 3. Find sentences and read in the text

a) what the purpose of preparing the income statement is;

b) what 'net profit before tax' means;

c) how net profit is distributed;

d) what the difference between the income statement of trade and service firms is.

TASK 4. Remember the situations in the text where these terms have been used.

Profit, gross profit, net profit, turnover, overall gross profit

TASK 5 A. Look through the text and find definitions of the following English terms.

The profit and loss Statement, sales, gross margin, resources, net profit before/after tax.

B. Look through the text and find English equivalents of the following word combinations.

a) pro forma targets b) rest c) gross margin d) to obtain

e) income statement f) goals g) to account h) financial

i) make adjustments j) revenue k) expenses I) to decrease

C. Make up questions with the terms given above.

TASK 6. Give a summary of the text.