Income statements · IGCSE Business

Explain two reasons why profit might be important to a business. Which reason is likely to be the most important? Justify your answer. Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award up to 2 marks for justified decision about which reason is likely to be the most important. Points might include:

• Use as a source of funds / reinvest back into the business [k] as there is no interest to pay [an] AND/OR allowing the business to expand [an]
• Measure of success [k] as low profit could suggest the business is not worth continuing/starting [an] OR which could help attract investors [an]
• Reward for risk-taking/return on shareholder/owner’s investment / pay dividends [k] as otherwise they could invest elsewhere [an] OR so keep/ not sell shares / buy more shares [an] AND/OR motivate them to work harder/carry on/earn more [an]
• Help attract investors [k] as may invest their money in hope of making a return on investment [an] OR allowing the business to grow/expand [an]
• Allow business to share profit with employees [k] which could increase motivation [an]
• Help decide whether to continue making/selling a product [k] Other appropriate responses should be credited. Justification might include: It can act as a measure of success [k] as low profit could suggest the business is not worth continuing [an]. It can be used as a source of funds [k] as there is no interest to pay [an]. Providing a source of funds is likely to be the most important reason because by being able to expand it could result in increased profit in the future [eval] which may help ensure there are positive returns for the owners [eval].

Calculate KPX’s expenses in 2024. Show your working. Award 2 marks for a correct answer. Award 1 mark for correct method but incorrect answer. Correct answer [2] i.e. $300 million Correct method but incorrect answer e.g.

• Gross profit – profit [1]
• $390m – $90m [1] If correct answer given with no working shown, award 2 marks.

Explain two reasons why profit is important for a business. Which reason is likely to be the most important? Justify your answer. Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award up to 2 marks for a justified decision about which reason is likely to be the most important. Points might include:

• Provides a source of funds [k] as no interest to pay [an]
• Reward for risk-taking [k] as owners invest their money in hope of making a return on investment / motivate them to continue [an]
• Represents a return on shareholder/owner’s investment/enterprise [k] as otherwise they could invest elsewhere [an]
• Help attract investors/finance [k] which could help the business to expand [an]
• Measure of success [k] as low profit could suggest the business is not worth continuing/starting up [an]
• Need for long-term survival [k] Other appropriate responses should be credited. Justification might include: It can provide a source of funds [k] for which there is no interest to pay [an]. It is also a reward for risk-taking [k] as owners invest their money in the hope of making a return on their investment [an]. Providing a source of funds is most important because if successful, this could provide the owners with more profit in the future [eval] which may even lead to greater returns for owners [eval].

Define ‘profit’. Award 2 marks for a full definition. Award 1 mark for a partial definition.

• (Total) income of a business (revenue) less total cost [2]
• (Total) revenue minus total costs [2]
• Difference between revenue and total cost [2]
• Gross profit – expenses [2] Partial definition e.g.
• Revenue minus costs [1] Other appropriate responses should also be credited.

Identify two expenses a business might have. Award 1 mark for each expense (max 2). Points might include:

• Rent
• Rates
• Electricity/gas/heating/lighting/water/utilities
• Insurance
• Interest
• Storage
• Marketing/advertising
• Salaries
• Maintenance/repairs
• Phone/internet Other appropriate responses should be credited.

Outline two possible reasons why FLD’s gross profit is decreasing. Award 1 mark for identification of each relevant reason (max 2). Award 1 mark for each relevant reference to this business (max 2). Points might include:

• Low/fall in amount of sales/demand/customers [k] at its 460 shops [app]
• Change in price / increase/decrease (selling) price [k] for the retailer [app]
• Increase in cost of sales /variable cost / increase in cost of inventory [k] so gross profit is at $200 million [app] Other appropriate responses should be credited.

Using Appendix 3 and other information, consider the extracts from the 12 income statements for the two companies in country P. Which company should TSE take over? Justify your answer using suitable calculations. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both companies. Well-justified recommendation. Candidates discussing both companies in detail, in context and with a well-justified recommendation, including why the alternative company was rejected, should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of one company. Judgement with some justification / some evaluation of choice made. Candidates discussing at least one company in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss the companies with little/no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining the two companies in context should be rewarded with the top marks in the band. 0 No creditable response. 0 Relevant points might include: Simple statements:

• Company B has twice as much revenue at $200m
• Company A has less revenue than Company B
• Company A has less than half the cost of sales, a difference of $50m
• Company B has higher cost of sales at $90m
• The expenses are less than twice as much for Company B at $60m
• Lower revenue means that Company A is probably smaller than Company B Possible calculations:
• The gross profit of Company A is $60m
• The gross profit margin of Company A is 60%
• The gross profit of Company B is $110m
• The gross profit margin of Company B is 55%
• The profit of Company A is $20m
• The profit margin of Company A is 20%
• The profit of Company B is $50m
• The profit margin of Company B is 25% Justification might include:
• TSE should take over Company A because it has a 5% higher gross profit margin than Company B. This suggests that it is more efficient in its management of variable costs. It is a smaller competitor as its revenue is lower at $100m and therefore it could require a lower amount of capital to take over the company. It should not take over Company B as TSE may need to borrow a much higher amount of capital as the company appears to be larger.
• TSE should take over Company B because it has much higher revenue suggesting it is a larger competitor than Company A and will better help TSE to achieve the aim of increasing its market share and it has a 5% higher profit margin than Company A.