Income Statements: What Profit Is And Why It Is Important (Copy)
Cheat Sheet: 5.3.1 Profit
How Profit is Made
| Term | Definition | Formula | Example |
|---|---|---|---|
| Revenue (Sales) | Income from goods/services sold | Price × Quantity Sold | $20 × 500 = $10,000 |
| Costs | Expenses of production (fixed + variable) | Rent, wages, materials | $7000 total |
| Profit | Revenue – Total Costs | $10,000 – $7000 = $3000 |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Importance of Profit (Private Sector)
| Importance | Explanation | Example |
|---|---|---|
| Reward for Risk-Taking | Entrepreneurs get return for taking risks | Owner of startup earns profit after years |
| Source of Finance | Profits reinvested for growth | Retail chain uses retained profits to open new branch |
| Measure of Success | Shows performance & competitiveness | Comparing profits year to year |
| Attracts Investors | High profits = more willing investors | Shareholders buy shares in Apple |
Difference Between Profit and Cash
| Aspect | Profit | Cash |
|---|---|---|
| Definition | Revenue – Costs (recorded) | Actual money available |
| Timing | Includes credit sales (may not be received yet) | Only received money counted |
| Example | Firm sells $5000 goods on credit → profit recorded | But no cash until debtors pay |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Quick Revision Bullets
- Profit = Revenue – Costs
- Importance = reward for risk, finance for growth, measure of success, attracts investors
- Profit ≠cash → business can be profitable but fail without liquidity
- Profit is recorded; cash is physical availability
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course