Two formal statements turn everything a business has done over the year into numbers stakeholders can actually judge it by — and reading them properly means looking well beyond the headline figure.
This final chapter brings together the cash flow tracking from 3.6.2 and the investment appraisal tools from 3.6.3 into two formal documents businesses actually produce: the income statement and the statement of financial position. Limited companies (see 3.1.2) are legally required to publish these each year, and they're read closely by exactly the stakeholders you met in 3.1.4 — owners judging their return, lenders assessing whether to extend credit, employees wondering about job security, and government checking tax is being correctly paid.
Financial statements serve two purposes at once: they let anyone assess how well a business has actually performed, and they give the business itself the evidence it needs to make informed decisions — whether to invest, cut costs, or change strategy — rather than guessing.
The income statement (sometimes called a profit and loss account) shows a business's revenue, costs and profit over a specific period of time — typically a year. Unlike the statement of financial position below, it captures performance across a period, not a single moment.
| Item | £ |
|---|---|
| Revenue | 600,000 |
| Cost of sales | 360,000 |
| Gross profit (Revenue − Cost of sales) | 240,000 |
| Other expenses (rent, wages, marketing, etc.) | 180,000 |
| Net profit (Gross profit − Other expenses) | 60,000 |
The distinction between gross and net profit matters. Gross profit only accounts for the direct cost of producing what was sold — the cost of sales. Net profit goes further, subtracting every other cost of actually running the business, from rent to marketing to administrative wages. A business can have healthy gross profit but weak net profit if its wider running costs are too high — which is exactly why both figures, not just one, matter for judging performance.
The statement of financial position (sometimes called a balance sheet) is fundamentally different from the income statement: rather than showing performance over a period, it's a snapshot of exactly what a business owns and owes at one single point in time, such as the last day of the financial year.
Because it's a snapshot rather than a record over time, a statement of financial position produced in January can look meaningfully different from one produced the following December — a business's assets and liabilities are constantly shifting as it trades, so the date the snapshot was taken always matters when interpreting it.
Raw profit figures are hard to compare between businesses of different sizes — a £60,000 net profit means something very different to a corner shop than to a national retailer. Expressing profit as a percentage of revenue lets a business compare performance fairly, against its own past years or against a rival of a completely different size.
Using the income statement figures above: gross profit margin = (£240,000 ÷ £600,000) × 100 = 40%. Net profit margin = (£60,000 ÷ £600,000) × 100 = 10%. The gap between the two — 40% down to 10% — shows exactly how much of that gross profit is being absorbed by the business's wider running costs.
A single year's profit margin, viewed in isolation, tells you surprisingly little. AQA specifically wants you to judge performance from several angles at once.
Is the margin healthy for this type of business and industry, taken on its own terms?
Is performance improving or declining over time — a single good year means little if the underlying trend is downward.
A margin that looks fine in isolation can still mean a business is falling behind if a direct rival is performing notably better (see 3.2.6).
The same set of figures can look very different depending on who's reading them.
Want strong profit and rising margins as a direct return on their investment.
Want evidence the business can comfortably repay what it owes.
Want stability and evidence the business can continue to pay wages and offer job security.
Wants accurate reporting to ensure the correct amount of tax is being paid.
A strong exam answer rarely stops at "the margin is 10%, which is good" — it goes further, checking that figure against last year, against a named or implied competitor, and asking what a specific stakeholder would actually make of it.
Drag each item into the correct category on the statement of financial position.
State two examples of a business's assets.
Structure guide: two correctly identified assets — 1 mark each, no explanation required.
State and explain two reasons why Hazelmere Interiors' falling net profit margin might concern its stakeholders.
Structure guide: state a reason grounded in the case study (1 mark), explain it (1 mark) — repeated twice over.
Calculate Hazelmere Interiors' gross profit margin and net profit margin for this year. Show your working.
Structure guide: gross profit = £600,000 − £360,000 = £240,000; gross margin = (£240,000 ÷ £600,000) × 100 = 40%. Net profit = £240,000 − £180,000 = £60,000; net margin = (£60,000 ÷ £600,000) × 100 = 10%. Marks are typically awarded for correct workings even if the final figure is wrong.
Analyse why Hazelmere Interiors' net profit margin this year compares unfavourably to both its own previous year and its competitor's margin, despite its revenue increasing.
Structure guide: a single developed line of reasoning grounded in the case study (eg: although revenue has risen, the net profit margin has still fallen from 12% to 10% → this suggests costs, whether cost of sales or other expenses, have grown even faster than revenue → meaning rising sales alone have not translated into stronger profitability → a concern reinforced by the competitor's notably higher 15% margin over the same period, suggesting the issue is specific to Hazelmere rather than the whole market).
Recommend what Hazelmere Interiors should investigate or do in response to its declining net profit margin. Justify your answer using the case study.
Structure guide: a "recommend" question needs a justified judgement — consider whether to investigate rising costs, review pricing, or benchmark specific expense lines against the better-performing competitor, before reaching a clear final recommendation grounded in the figures given.
From 3.1's foundations of business, through influences, operations, human resources and marketing, to this final chapter on analysing financial performance — every sub-topic on the specification is now covered, each with worked examples, real UK businesses, and exam-style practice built in. Good luck with your revision.