HILLCREST HEIGHTS INSTITUTE

Sitio Tambacan, San Francisco, Magalang Pampanga

S.Y. 2020-2021

BUSINESS MATHEMATICS

LESSON 2 PROFIT OR LOSS

Profit – is what remains of the selling price (sales) after all costs and expenses had been
deducted.
Cost – means the cost of the product sold or service rendered.
Expenses – refer to operating expenses (administrative and selling expenses) and financial
expenses (interest and other finance charges).
Loss – occurs when the cost and expenses exceed the selling price or sales.

INCOME STATEMENT FOR A TRADING FIRM

 Trading or merchandising firm buy goods that it sells.
Sales – the account used to report the selling price of the merchandise.
Gross sales – refer to the total sales.
Sales discounts; sales returns; allowances – are deducted from the gross sales to arrive at
the net sales.
Cost of goods or cost of sales – the cost of the item that seller buys.
Income statement – the financial statement that shows the results of operation, that is, if it
earns a profit or incurs a loss for a given period of time.
 Generally, a firm prepares financial statement on a monthly basis.
 For tax purposes, it is prepared quarterly and annually.
 It details the sales, the cost of sales, the operating expenses, and other expense
and/or other income, if any.
Cost of sales – the purchase price and other expenses incurred in buying the products that
the business has to sell including the freight-in or transportation of the goods it buys for
resale.
Operating expenses – are expenses incurred to run the business.
Other income – includes interest income and other incidental income the firm earns like
rent income if it has a property that it rents out.
Other expense – includes interest expense or finance charges financial institutions charge
firms for their services.
Gross profit – at times referred to as gross margin.
Operating profit/loss – is gross profit less operating expenses.
Net profit/loss – is operating profit plus other income less other expense.

Sample of income statement:

Metatag Merchandising
Income Statement
For the Year Ended June 30, 201B

Sales Ᵽ 117 000

Less: Cost of Sales Ᵽ 59 000
Gross Profit Ᵽ 58 000
Less: Operating Expenses
Communication Expense Ᵽ 1 000
Delivery Expense Ᵽ 5 000
Rent Expense Ᵽ 5 500
Salary Expense Ᵽ 8 300
Bad Debts Expense Ᵽ 600
Office Supplies Expense Ᵽ 700
Store Supplies Expense Ᵽ 1 500
Depreciation Expense
Furniture and Equipment Ᵽ 1 000 Ᵽ 23 600
Operating Profit Ᵽ 34 400
Add: Other Income
Interest Income Ᵽ 800
Commission Income Ᵽ 1 500 Ᵽ 2 300
Less: Other Expense
Interest Expense Ᵽ 1 200 Ᵽ 1 100
NET PROFIT Ᵽ 𝟑𝟓 𝟓𝟎𝟎

BREAK-EVEN POINT
 Is the point where a business neither makes a profit nor a loss.
 A business’ revenue is equal to its total costs.
 To determine the number of units to be sold to break-even;
𝑆𝑎𝑙𝑒𝑠 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 + 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 (1)
 Let x represent the number of units to break-even, use the following formula
adopted from above formula (1):
𝑃𝑥 = 𝑣𝑥 + 𝐹𝐶
Where: P is the unit price;
x is the number of units;
v is the variable cost per unit; and
FC is total fixed cost.
 To solve for x:
𝑃𝑥 − 𝑣𝑥 = 𝐹𝐶
𝑥 (𝑃 − 𝑣) = 𝐹𝐶
𝐹𝐶
𝑥=
(𝑃 − 𝑣)
 Therefore, the break-even point in number of units would be:
𝐹𝐶
𝑥 = (𝑃−𝑣) (2)
 The break-even point in pesos would be:
𝐵𝐸𝑃 𝑖𝑛 𝑃𝑒𝑠𝑜𝑠 = 𝑈𝑛𝑖𝑡 𝑃𝑟𝑖𝑐𝑒 × 𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠
Example:
Calculate the break-even point in sales units and sales dollars from the
following information:
Unit price Ᵽ 20
Variable cost Ᵽ8
Fixed costs Ᵽ 12 000
Substituting the given values into the formula for break-even point in sales
units, we get;
Ᵽ 12 000 Ᵽ 12 000
𝐵𝐸𝑃 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 = = = 1 000 𝑢𝑛𝑖𝑡𝑠
Ᵽ 20 − Ᵽ 8 Ᵽ 12

𝐵𝐸𝑃 𝑖𝑛 𝑃𝑒𝑠𝑜𝑠 = Ᵽ 20 × 1 000 𝑢𝑛𝑖𝑡𝑠 = Ᵽ 20 000