FINM6221 LU2
FINM6221 LU2 – Interpreting financial
results
2.1 Introduction
Use of financial statements:
- Used to facilitate communication between FM and various stakeholders
- Used to make management decisions
2.2 The Effect of Statement of Profit or Loss and other Comprehensive
Income Items on Net Profit
This statement measures financial performance over a specific period which is the result of
deducting a series of expenses from a series of income.
Following items in statement of p/l and other comprehensive income:
- Sales - Gross profit - Interest
- Cost of sales - Expenses - Income tax
2.2.1 Sales
How to ensure there is an increased demand for your products:
- Have the best product possible
- Ensure your products are up to date with trends and do well in the market
- Set new trends w new products
- Advertise your products to the right target markets
- Offer discounts to increase sales
- Keep your sales returns to a min
If you reduce your markup percentage, it is called a mark-down!
2.2.1.1 Sales Returns
Customers can return items they have bought due to any number of reasons.
Accounted for by subtracting them from the total sales.
2.2.2 Cost of sales
VAT = tax that is levied indirectly on g/s consumed in the economy. 15%!
COS = net purchase of goods that have been sold during a particular period.
Business buys bread for R115 (incl VAT), sells it for R172.50 (incl VAT), sales revenue will
be R150 (172..15) and COS is R100 (R.15). Gross profit is R50 (150 - 100)
Sales – Cost of sales = Gross Profit
2 things to max profits:
1
, FINM6221 LU2
1. Increase sales revenue 2. Decrease cost of sales
Ways to reduce cost of sales:
- Negotiating better terms with suppliers
- Shrinkage (ensure less damage or inventory loss)
- Reduce transportation costs before goods are sold
- Buy from a different supplier
- Buy in bulk to get a better purchase price
2.2.3 Gross Profit
Gross profit =difference btwn net sales and cost of sales
- “gross” = before deductions
Net profit = profit after accounting for expenses
Net sales = sales revenue (excl VAT) – sales returns
- ‘net’ = after deductions
2.2.4 Operating Expenses
Consist of 2 components:
- Marketing and selling expenses
o Costs incurred during the selling of g/s
- General and admin expenses
o Costs incurred in the production of goods
Operating expenses = overheads
2.2.5 Interest
Interest = cost of money
Rule of thumb for interest – it is always classified as income or expenses depending on if the
company is receiving or paying
2.2.6 Income Tax
All CC and companies that operate in SA pay a tax
rate of 28% - this is charged on the net profits of the
business.
Tax amount:
280 000 x 28% = 78 400
2
FINM6221 LU2 – Interpreting financial
results
2.1 Introduction
Use of financial statements:
- Used to facilitate communication between FM and various stakeholders
- Used to make management decisions
2.2 The Effect of Statement of Profit or Loss and other Comprehensive
Income Items on Net Profit
This statement measures financial performance over a specific period which is the result of
deducting a series of expenses from a series of income.
Following items in statement of p/l and other comprehensive income:
- Sales - Gross profit - Interest
- Cost of sales - Expenses - Income tax
2.2.1 Sales
How to ensure there is an increased demand for your products:
- Have the best product possible
- Ensure your products are up to date with trends and do well in the market
- Set new trends w new products
- Advertise your products to the right target markets
- Offer discounts to increase sales
- Keep your sales returns to a min
If you reduce your markup percentage, it is called a mark-down!
2.2.1.1 Sales Returns
Customers can return items they have bought due to any number of reasons.
Accounted for by subtracting them from the total sales.
2.2.2 Cost of sales
VAT = tax that is levied indirectly on g/s consumed in the economy. 15%!
COS = net purchase of goods that have been sold during a particular period.
Business buys bread for R115 (incl VAT), sells it for R172.50 (incl VAT), sales revenue will
be R150 (172..15) and COS is R100 (R.15). Gross profit is R50 (150 - 100)
Sales – Cost of sales = Gross Profit
2 things to max profits:
1
, FINM6221 LU2
1. Increase sales revenue 2. Decrease cost of sales
Ways to reduce cost of sales:
- Negotiating better terms with suppliers
- Shrinkage (ensure less damage or inventory loss)
- Reduce transportation costs before goods are sold
- Buy from a different supplier
- Buy in bulk to get a better purchase price
2.2.3 Gross Profit
Gross profit =difference btwn net sales and cost of sales
- “gross” = before deductions
Net profit = profit after accounting for expenses
Net sales = sales revenue (excl VAT) – sales returns
- ‘net’ = after deductions
2.2.4 Operating Expenses
Consist of 2 components:
- Marketing and selling expenses
o Costs incurred during the selling of g/s
- General and admin expenses
o Costs incurred in the production of goods
Operating expenses = overheads
2.2.5 Interest
Interest = cost of money
Rule of thumb for interest – it is always classified as income or expenses depending on if the
company is receiving or paying
2.2.6 Income Tax
All CC and companies that operate in SA pay a tax
rate of 28% - this is charged on the net profits of the
business.
Tax amount:
280 000 x 28% = 78 400
2
