Accounting for Managers: Interpreting accounting information for decision-making

70 ACCOUNTING FOR MANAGERS

Expenses will include all the other (selling, administration, finance etc.) costs of the
business, that is those not directly concerned with buying, making or providing
goods or services, but supporting that activity. The same retailer may treat the
rent of the store, salaries of employees, distribution and computer costs and so on
as expenses in order to determine theoperating profit.

operating profit=gross profit−expenses

The operating profit is one of the most significant figures because it represents
the profit generated from the ordinary operations of the business. It is also called
net profit,profit before interest and taxes (PBIT)orearnings before interest and
taxes (EBIT).
The distinction between cost of sales andexpenses can vary between industries
and organizations. A single store may treat only the product cost as the cost of
sales, and salaries and rent as expenses. A large retail chain may include the
salaries of staff and the store rental as cost of sales with expenses covering the head
office, corporate costs. For any particular business, it is important to determine the
demarcation between cost of sales and expenses.
From operating profit, a company must payinterestto its lenders,income tax
to the government and adividendto shareholders (for their share of the profits as
they – unlike lenders – do not receive an interest rate for their investment). The
remaining profit is retained by the business as part of itscapital(see Table 6.2).

Reporting financial position

Not all business transactions appear in the Profit and Loss account. The second
financial statement is theBalance Sheet. This shows the financial position of the
business – its assets, liabilities and capital – at theendof a financial period.
Some business payments are to acquire assets.Fixed assetsare things that
the businessownsand uses as part of its infrastructure. There are two types of
fixed assets: tangible and intangible.Tangible fixed assetscomprise those physical
assets that can be seen and touched, such as buildings, machinery, vehicles,
computers etc.Intangible fixed assetscomprise non-physical assets such as the

Table 6.2 Profit and Loss account (extended)

Operating profit before interest and tax 100,000

Less: interest 16,000

Profit before tax 84,000

Less: income tax 14,000

Profit after tax 70,000

Less: dividend 30,000

Retained profit 40,000