Read and amend a statement of profit or loss
Explain what a statement of profit or loss reports, follow its main totals, amend supplied figures and trace a change through to retained earnings.
Section 10.1 · Financial statements
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 10.1.1. Ratio calculations use the formulae listed in the relevant Cambridge syllabus. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Read the figures, dates and assumptions supplied in the question before calculating or interpreting an accounting result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What period does a statement of profit or loss describe?
What you will learn
- Explain the purpose and period covered by the statement
- Relate revenue, cost of sales, gross profit, expenses and profit for the year
- Amend given data and explain a change through dividends and retained earnings
A statement reports performance over a period
The statement of profit or loss summarises revenue earned and expenses recognised during a stated accounting period. It reports accounting profit, not the cash remaining in the bank; timing differences, credit sales, inventory and non-cash expenses matter.
A useful sequence is revenue less cost of sales to find gross profit; deduct operating expenses to find profit from operations (operating profit); deduct taxation to find profit for the year. Dividends are distributions to shareholders, not operating expenses. Profit for the year less dividends gives the amount retained from that year's profit, subject to the information and presentation supplied.
Amend a statement by tracing each change
Read whether a figure is an expense, an income item, tax or a distribution, then place it in the correct part of the statement. A higher cost of sales lowers gross profit and, other things equal, profit from operations and profit for the year.
A higher expense after gross profit reduces profit from operations; a higher tax charge reduces profit for the year but not profit from operations. A larger dividend reduces retained earnings from the period's profit but does not change profit for the year. Keep the time period and units consistent.
Pause and explain
Profit for the year is $50,000 and dividends are $12,000. How much of this year's profit remains after the distribution?
Worked example
A retailer reports revenue of $240,000, cost of sales of $144,000, operating expenses of $54,000, tax of $12,000 and dividends of $8,000. Find gross profit, profit from operations, profit for the year and retained profit from this year's profit.
Show the worked solution
- Gross profit = 240,000−144,000.
- Profit from operations = 96,000−54,000.
- Profit for the year = 42,000−12,000; retained profit = 30,000−8,000.
Answer Gross profit is $96,000; profit from operations is $42,000; profit for the year is $30,000; and $22,000 of this year's profit is retained after dividends. This retained amount is not necessarily cash.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Revenue is $180,000, cost of sales $108,000, operating expenses $42,000 and tax $7,000. Calculate gross profit, operating profit and profit for the year.
Give me a hint
Work down the statement in order, using each subtotal once.
Compare my reasoning
- Gross profit = revenue−cost of sales.
- Operating profit = gross profit−operating expenses.
- Profit for the year = operating profit−tax.
Gross profit = $72,000; operating profit = $30,000; profit for the year = $23,000.
Look for these in your work
- Gross profit is correct
- Operating expenses are deducted after gross profit
- Tax is deducted after operating profit
A business discovers that a $4,000 delivery expense was omitted. Explain the effect if it is an operating expense and tax is unchanged.
Give me a hint
Insert it in expenses, then trace each later subtotal.
Compare my reasoning
- Operating expenses rise by $4,000.
- Profit from operations falls by $4,000.
- With tax unchanged, profit for the year also falls by $4,000.
The corrected statement has $4,000 more operating expense, so profit from operations and, with tax unchanged, profit for the year each fall by $4,000. The omission should be corrected before comparing results.
Look for these in your work
- Expense is placed in the right category
- Effect on operating profit is traced
- Effect on profit for the year is conditional on tax
A company increases its dividend while revenue, expenses and tax are unchanged. Explain what changes and what does not in the statement.
Give me a hint
Separate the performance subtotal from the distribution of profit.
Compare my reasoning
- Revenue and expenses have not changed.
- Profit for the year therefore stays the same.
- More profit is distributed and less of the year's profit is retained.
Profit for the year is unchanged because revenue, expenses and tax are unchanged. The larger dividend reduces the amount of this year's profit retained; it does not itself reduce operating profit or profit for the year.
Look for these in your work
- Profit is separated from dividend policy
- Retained amount moves in the right direction
- No unsupported cash claim is made
Common mistakes
- Treating dividends as an operating expense
- Calling accounting profit the same as cash
- Subtracting tax before calculating profit from operations
What can you explain now?
What period does a statement of profit or loss describe?
Compare with the explanation
A stated accounting period
It summarises performance between dates, unlike the statement of financial position, which is at one date.
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Make it stick
How do revenue, costs, expenses, tax, profit for the year, dividends and retained profit relate?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.