How Many Types of Profits Are There? (21.1)

Chapter 21 - Income Statements

Lesson Objective: To understand the different types of profit

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Profit = Revenues - Costs

Not all profits are the same though - we have three different types:

1. Gross Profit;

2. Net Profit (or just Profit);

3. Retained Profit.

Let's start by looking at Gross Profit, which is the simple different between revenue and the costs of making/selling the product:

COGS (Cost of Goods Sold) is also referred as CoS (Cost of Sales) and is calculated by:

COGS includes:

- Direct labor;

- Direct materials or raw materials;

- Overhead costs for the production facility;

COGS excludes:

- Rent;

- Utilities;

- Salaries and wages.

Net Profit is different as it takes into account Total Costs and not only COGS:

Finally, Retained Profit, all the profit the company manages to keep to be reinvested:

Activity 21.1 (p. 269)

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Profit is an important number for private sector businesses:

- It's a measure of business success;

- It's a measure of managers' performance;

- Retained Profit is the most important source of internal financing for non-current assets and expansion;

- It's important for attracting investors;

- It shows whether or not to continue making a product.

It's important to remember that Profit # Cash:

- Getting a loan increases cash, not profit;

- Getting investment increases cash, not profit;

- Capital expenditure decreases cash, not profit (likely to increase);

- Selling goods on credit increases profit but does not increase cash immediately.

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Test Yourself (p. 272)

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To-Do-List:

• Case Study - Jimmy Lie (p. 271)

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Chapter 21 - Income Statements