3 4 - Profit & Loss - IB Business Management

Summary

This video introduces Chapter 3.4 on final accounts, focusing on profit and loss and balance sheets, crucial for financial performance analysis. It explains the significance of these accounts to stakeholders like investors, managers, banks, and suppliers. The tutorial constructs a profit and loss statement for 'Charles's Chairs', detailing revenue, costs, and profits, and contrasts it with a non-profit enterprise, emphasizing the reinvestment of surplus back into the business.

Takeaways

• 📚 Chapter 3.4 focuses on final accounts, emphasizing the importance of understanding profit and loss and balance sheets for financial performance evaluation.
• 🔍 Final accounts, including profit and loss statements and balance sheets, are crucial for stakeholders to assess a company's financial health.
• 💼 Stakeholders such as investors, managers, banks, suppliers, employees, and governments have a vested interest in a company's financial accounts.
• 📈 The profit and loss statement, also known as the income statement, summarizes a company's financial performance over a specific period, typically a year.
• 💹 The formula for calculating profit is Revenue minus Total Cost, which can be broken down into fixed and variable costs.
• 🛠️ The International Baccalaureate (IB) has a strict format for presenting the profit and loss statement, which must be followed in examinations.
• 💵 Sales revenue is calculated by multiplying the number of units sold by the price per unit, and cost of sales is calculated by multiplying the number of units by the cost to produce each one.
• 🏢 Expenses include fixed costs such as rent and electricity, which are subtracted from gross profit to find profit before interest and tax.
• 📉 Interest and tax are deducted from profit before interest and tax to arrive at the profit for the period, a key figure indicating the company's net profit.
• 🌐 For nonprofit enterprises, the profit and loss statement is structured similarly but uses 'surplus' instead of 'profit', and dividends are not paid as all surplus is retained by the business.
• 📝 The script provides a detailed example of constructing a profit and loss statement for a business named Charles's Chairs, illustrating the calculation of revenue, costs, and final profit.

Q & A

What is the main focus of Chapter 3.4 in the syllabus?

Chapter 3.4 focuses on final accounts, specifically covering profit and loss, balance sheets, and depreciation, which are important for understanding a business's financial performance.

Why are profit and loss and balance sheets important for stakeholders?

Profit and loss and balance sheets are important for stakeholders because they provide insights into a company's financial performance, which helps investors, managers, banks, suppliers, employees, and others make informed decisions.

What are the three main components of a company's financial performance typically included in an annual report?

The three main components are the statement of profit and loss, the balance sheet, and the cash flow statement.

How does the profit formula presented in the script relate to calculating a business's profitability?

The profit formula, which is Revenue minus total cost (or Revenue minus fixed cost minus variable cost), is used to calculate a business's profitability by determining how much profit is made after covering all costs.

What is the significance of the IB's strict format for the profit and loss statement?

The International Baccalaureate (IB) prescribes a strict format for the profit and loss statement to ensure consistency and comparability across different businesses, which is crucial for accurate financial analysis.

Can you explain the example given in the script about Charles's chairs?

Charles's chairs sells chairs at $40 each, with a production cost of $20 per chair. The script uses this example to demonstrate how to construct a profit and loss statement, calculating revenue, cost of sales, gross profit, expenses, and ultimately the profit for the period.

What is the difference between 'profit' and 'surplus' in the context of the script?

In the script, 'profit' refers to the financial gain of a for-profit business, while 'surplus' is used for nonprofit enterprises, indicating the excess of income over expenses that is reinvested back into the business or mission.

Why might a business choose to pay dividends to its shareholders?

A business might choose to pay dividends to satisfy shareholders, as it provides them with a return on their investment. This can also potentially have a positive impact on the share price, attracting more investors.

What are the potential benefits for a business that retains its profits instead of paying dividends?

Retaining profits allows a business to reinvest the funds into growth opportunities, which can lead to increased profitability and potentially higher dividends in the future, thus having a positive long-term impact.

How does the script differentiate between a for-profit and a nonprofit enterprise in terms of financial reporting?

The script differentiates by using the term 'surplus' instead of 'profit' for nonprofits, showing zero tax liability for nonprofits, and indicating that all surplus is retained since there are no dividend payments in a nonprofit enterprise.

What is the purpose of the profit and loss statement according to the script?

The profit and loss statement, also known as the income statement, summarizes a business's financial performance over a given period, typically a year, by detailing revenue, costs, and profit.

Outlines

00:00

📚 Introduction to Final Accounts

This paragraph introduces Chapter 3.4 on final accounts, emphasizing its importance within the finance and accounts syllabus. It covers the purpose of final accounts, which is to outline the financial performance of a business over time, particularly for publicly held companies that publish these in their annual reports. The chapter will focus on profit and loss statements, balance sheets, and depreciation. The video script also discusses why stakeholders are interested in these accounts, including investors, managers, banks, suppliers, employees, customers, and governments.

05:00

💼 Constructing a Profit and Loss Statement

This paragraph details the process of constructing a profit and loss statement using the example of Charles's chairs. It explains how to calculate sales revenue, cost of sales, and gross profit. The script then moves on to calculate expenses, profit before interest and tax, interest, and profit before tax. It concludes with the calculation of profit for the period, dividend payments, and retained earnings. The importance of adhering to the International Baccalaureate (IB) prescribed format for the profit and loss statement is highlighted.

10:02

🌐 Profit and Loss for a Nonprofit Enterprise

The final paragraph contrasts the profit and loss statement of a for-profit business with that of a nonprofit enterprise. It uses the same figures as the for-profit example but adjusts the terminology to reflect the nonprofit nature. Gross profit becomes gross surplus, and there are no dividend payments as profits are reinvested into the business. The tax is also zero for the nonprofit enterprise. The paragraph concludes with a brief discussion on the benefits of paying dividends versus retaining earnings for business growth.

Keywords

💡Profit and Loss

The 'Profit and Loss' is a financial statement that summarizes a company's revenues, costs, and expenses during a specific time period, typically a fiscal year. It is also known as the income statement. In the video, the presenter explains how to construct a profit and loss statement using the example of 'Charles's Chairs', detailing how sales revenue minus the cost of sales and other expenses results in the net profit or loss. This is a key indicator of a company's financial health and is crucial for stakeholders to assess the company's performance.

💡Balance Sheet

A 'Balance Sheet' is a financial statement that presents a company's financial position at a specific point in time, showing its assets, liabilities, and equity. It is one of the three key financial statements used to assess a company's financial health. The video mentions that the balance sheet will be covered in the second video of the series, indicating its importance in understanding a company's overall financial stability.

💡Stakeholders

In the context of the video, 'Stakeholders' refers to individuals or groups who have an interest or stake in a company's financial performance. These can include investors, managers, banks, suppliers, employees, customers, and governments. The presenter explains that stakeholders use financial accounts to make decisions, such as whether to invest, lend, or provide trade credit to a business, highlighting the importance of financial transparency.

💡Annual Report

An 'Annual Report' is an annual publication that companies release to communicate their financial performance and progress to shareholders and the public. The video script mentions that publicly held companies publish their financial performance in the annual report, which typically includes the statement of profit and loss, balance sheet, and cash flow statement.

💡Revenue

'Revenue' is the income generated from the sale of goods or services related to the company's primary operations. In the video, the presenter calculates revenue by multiplying the number of chairs sold by the price per chair, demonstrating how revenue is the starting point for determining a company's profitability.

💡Cost of Sales

The 'Cost of Sales', also known as cost of goods sold (COGS), represents the direct costs attributed to the production of the goods sold by a company. In the script, it is calculated as the cost to manufacture each chair multiplied by the number of chairs sold, showing how it reduces the overall revenue to determine gross profit.

💡Gross Profit

'Gross Profit' is the profit a company makes after deducting the costs directly associated with producing and selling its products or services. The video illustrates this by subtracting the cost of sales from the revenue, which gives an insight into the company's profitability from its core operations before considering other expenses.

💡Expenses

'Expenses' in the video refer to the operational costs incurred by a company that are not directly tied to the production of goods or services. An example given is rent and electricity, which are subtracted from the gross profit to calculate the profit before interest and tax, indicating the company's operational efficiency.

💡Interest

In the financial context of the video, 'Interest' is the cost of borrowing money, typically paid on loans or debts. The presenter calculates interest by applying the interest rate to the loan amount, showing how it is an expense that reduces the profit before tax.

💡Tax

'Tax' refers to the mandatory financial charge levied by a government on business profits. The video explains how tax is calculated as a percentage of the profit before tax, which impacts the final profit figure and is a critical component of a company's financial obligations.

💡Dividends

'Dividends' are the distributions of a portion of a company's earnings, at the discretion of the board of directors, to its shareholders. The video discusses how dividends are paid from the company's profits and how the decision to pay dividends can affect shareholder satisfaction and the company's growth potential.

💡Retained Earnings

'Retained Earnings' represent the portion of a company's net income that is retained by the company instead of being distributed to shareholders as dividends. In the video, retained earnings are highlighted as a key component of a company's capital for reinvestment and growth, especially in the context of nonprofit enterprises.

Highlights

Introduction to Chapter 3.4 on final accounts, emphasizing the importance of profit and loss and balance sheets in exams.

Outline of the syllabus for finance and accounts, focusing on financial performance metrics.

Explanation of who stakeholders are and why they are interested in a company's accounts.

The role of annual reports in publicly held companies and what they typically include.

Importance of profit and loss accounts for investors to decide on investment strategies.

How managers use profit and loss to measure performance against targets and set future goals.

The significance of accounts for external stakeholders like banks and suppliers in credit decisions.

Definition and purpose of the profit and loss statement, also known as the income statement.

The formula for calculating profit: Revenue minus total costs.

Introduction to the example of Charles's chairs to demonstrate the construction of a profit and loss statement.

The International Baccalaureate's strict format requirements for presenting a profit and loss statement.

Detailed step-by-step construction of a profit and loss statement for Charles's chairs.

Calculation of sales revenue by multiplying the number of chairs sold by the price per chair.

Explanation of cost of sales and its impact on calculating gross profit.

Introduction to expenses, such as rent and electricity, and their role in the profit calculation.

Calculation of profit before interest and tax by subtracting expenses from gross profit.

Explanation of how interest payments on loans affect profit calculations.

The process of calculating profit before tax and the subsequent tax payments.

Final calculation of profit for the period after all deductions.

Discussion on the distribution of profits through dividends and retained earnings.

Comparison of profit and loss statements for for-profit versus non-profit enterprises.

Conclusion and预告 of the next video on balance sheets.

Transcripts

[Music]

hello everyone welcome to the first

video in chapter 3.4 final accounts and

this is obviously the fourth chapter in

topic three finance and accounts

syllabus looks like this I'd say this is

quite an important chapter in the in the

syllabus profit and loss and balance

sheets come up a lot in the exam so I

think this is one to really really focus

on so in the first video we're going to

do profit and loss second video balance

sheet and in the third video we're going

to do the HL only content which is

depreciation so first off the purpose of

accounts of different stakeholders um so

just quickly we'll Define what final

accounts are these are basically these

outline the financial performance of a

business over time it's all about the

financial performance how are they doing

with the numbers the profits and things

like that for publicly heeld companies

these are published in the annual report

and so a uh an annual report financial

performance usually includes three

things which is statement of profit and

loss a balance sheet and a cash flow

cash flow is dealt with in a different

chapter in the syllabus but this chapter

deals with profit and loss and balance

sheet now why would people be interested

in the accounts and this is um the

purpose of accounts of different

stakeholders we're ticking off this

learning objective here well firstly

investors are going to be very very um

interested both current and potential

investors so for current investors

they're going to be well should I

continue to have my share in this

business for potential businesses they

might be should I invest in this company

so if a potential investor sees that the

profit and loss is really good then

maybe they might decide to invest in

that

stock managers within the company can

measure performances against targets so

maybe they said we're going to make 100

million this year and they made 110

million that they can see that they

overachieved and it can also help to

make future Targets in the future

external stakeholders while banks will

be interested should we lend money to

the business if the business wants to

borrow money then they can show them

their final accounts and then the bank

can make a decision about how profitable

they are and whether they're a good a

good business to lend money to and I

think the same argument for suppliers we

talked about Trade Credit um in another

chapter but Trade Credit means that we

allow the company to pay later so um if

you are going to give Trade Credit to a

business you want to make sure they've

got the ability to pay later so looking

at their final accounts might be useful

and then there's others employees

customers governments basically pretty

much all of those stakeholders we did in

the earlier chapter are going to have

some interest in the accounts whether

they look at them or not is another is

another thing but there we go so the

profit and loss is also known as the

income statement um and it is a summary

of the business's financial performance

over a given time period and normally

that's a year but it could also be a

quarter and basically we're going to use

Revenue cost and profit which we've done

in in a previous chapter to calculate

how much a businesses made so I put this

in inverted commas how much a business

is made is basically how profitable they

are and there's a quick reminder of the

profit formula Revenue minus total cost

or Revenue minus fixed cost minus

variable cost and we're going to do some

sort an application of a variation on

that formula today and the example we're

going to do is Charles's chairs so I'm

not I'm not going to read that now but

we're going to go through this example

and we're going to construct a profit

and loss during this video so I'm going

to be using these numbers but first a

quick thing to think about which is that

the IB is very very strict in the format

of the profit and loss they publish the

exact format that they want you to do to

you to do um they publish in the it's in

the IB guide and that's that's the

format that I'm going to be showing you

in this video um other syllabuses other

countries might use different formats

for the profit and loss but they they

kind of kind of all do the same thing so

we're going to use a very very specific

example today and you can see that

there's a mark scheme here that says um

the candidate has to do the profit and

loss according to the IB prescribed

format so just to say that again I'm

going to be using that IB prescribed

format so let's begin the production of

the profit and loss and like I said I'm

going to use this question here for for

the profit and loss and we're going to

construct one from these numbers so I'm

just going to read the first two bullet

points which we're going to use here

Charles's chairs sells 100 chairs for

$40 each and it costs $20 to make each

one so the first thing we're going to do

is we're going to make a title so we

want to say statement of profit and loss

for Charles's chairs or whatever the

name of the business is for the year

ended 31st of December 2025 I put this

in green because when you do this as a

question

that date will be given to you so the

first thing we're going to want to

calculate is the sales revenue and here

this is the money we effectively make

from selling the product so we have 100

shares we sell at $40 each so we do 100

time 40 which gives us 4,000 and then

across the top under sale not under

sales revenue to the side we do sales

revenue is 4,000 and up here I put

dollars up here so that all of these

numbers on here under here are dollars

so we don't have to put dollars next to

every single number next up is cost of

sales uh so it costs $20 to make each

one so again 100 chairs times 20 it

costs us 2,000 to make those 100 chairs

so we put 2,000 over here now we put

this 2,000 into brackets here the

brackets means it's a negative number

because effectively we're going to take

the cost of sales away from the revenue

um we could use a negative sign but

generally when we do Finance we we use

brackets because it's easier to see the

brackets we might miss a minus somewhere

gross profit is then Revenue Minus cost

of sales and so we do the 4,000 minus

2,000 gives us

2,000 okay moving on to the next stage

we're going to do this red bullet point

here they also have to pay 1,000 for

rent and

electricity so the next part of the

profit and loss is expenses which are

effectively the fixed or indirect cost

not involved in production so in an

earlier chapter you have learned these

as fixed cost here we're going to call

them expenses and the question just

gives it to us there it's a thousand so

we put that here a th and again we put

it in Brackets because it's a negative

number then the next row is profit

before interest and tax we're going to

do interest and tax later that's why

it's called profit before interest and

tax and we do gross profit minus

expenses so we do 2,000 minus a th000

gives us a th000

there on to the next bit um we're now

going to do um this bullet point here

they have a loan of 4,000 and pay 5%

interest so what we're going to do first

is calculate the interest only the

interest paid on any loans so we do

4,000 multipli by 5% which is

0.05 gives us 200 so the interest is 200

again it's a negative number because

it's going to reduce our profit and then

profit before tax is profit before

interest and tax minus interest it's a

difficult one to say that and so we do

1,00 minus the 200 gives us

800 and then almost that we've got this

one to them just going to move my head

to about there so next we do tax so pay

tax on any profit so in most countries

you pay ta if a business makes money

then um they have to pay tax on that

profit not everywhere but in general so

here we take the profit before tax which

is 00 and here it's telling us for tax

rate is 25% so we do 800 multipli by the

25% gives us 200 and then we get profit

for period which is profit before tax

minus tax so we do be 800 minus the 200

gives us 600 and that's almost finished

now why is this in green this is because

this is probably you know one of the

most important numbers on the profit and

loss this is effectively what how much

money the business is made in profit

after um deducting all of these things

so after deducting cost of sales

expenses interest and tax the business

is making 600 now the final part of the

profit and loss is what do they do with

that money so they've made this 600 and

there's two things effectively they can

do with this money firstly they can pay

dividends now dividend payments are when

they pay a part of the profit to the

owners of the business um and the rest

of it is then what's called retained so

the word retain means the business

effectively keeps it the word retain

means to keep something so the business

keeps the um keeps the rest and then

that goes back into the

business now in this situation they've

made 600 and I've chosen these numbers

myself that they've paid 200 in

dividends the rest um is retained and

goes back into the business so just

briefly what are the pros of paying

dividends well if you do pay dividends

the higher the dividends you pay so the

more of the 600 that's paid as into

dividends that will satisfy shareholders

because they've bought the share they've

invested in the company they're going to

make more money back so they're more

likely to hold on to their shares and

they may be a positive impact on the

share price because if a company pays a

good dividend then share then investors

will see that be like well I want to buy

that share because they're going to give

me more of their profit so I might see a

positive increase on the share price

the pros of not paying dividends is the

business can retain the money and grow

the business so if they paid zero

dividends here they'd have 600 which

they can retain that 600 and by growing

the business that in theory might lead

to higher profits and even higher

dividends in the future so by not paying

the dividends you have this positive

long-term

impact and in general um it's normally

some sort of combination of the two so

normally a business will pay both

dividends

um and also retain some money into the

business okay and on to the final slide

which is actually another profit and

loss in this situation I've used the

exact same numbers but here we have

Charles's chair is a nonprofit

Enterprise now you've seen that in a

previous chapter but nonprofit

Enterprise means that the business can

still make a profit but that profit

doesn't get paid to owners it goes back

into the business and what we're going

to do now is do a profit loss for a

nonprofit Enterprise so we put the title

at the top the title should be the same

the sales revenue and cost of sales

should be identical and the first change

is instead of gross profit we use the

word gross Surplus so anywhere where

previously we have profit we now use the

word

Surplus then we minus expenses and we

get Surplus before interest which was

profit before interest previously but

now it's Surplus before interest then we

play interest and then we have Surplus

before tax here's the second change here

the tax is going to be zero because

usually nonprofit Enterprises don't pay

tax because effectively that's one of

the benefits of being a nonprofit

Enterprise so we did Surplus before tax

of 800 minus 0 gives Surplus for a

period of 800 so previously this was

profit for period but now the business

is effectively making

800 now the Third change is that there's

no dividend payments because remember we

don't pay dividends to owners because

that's one of the characteristics of a

nonprofit so there's no Row for

dividends and everything is now retained

Surplus okay that's profit and loss done

and the next one we'll do balance sheet

I'll see you then