Revenue is the total value of sales. Gross profit is revenue minus cost of sales. Net profit is gross profit minus all other expenses. Each figure answers a different question, and exam cases ask you to calculate one and comment on another.
This skill is the first step in financial statements and ratios. Every ratio you meet later in the module is built from one of these three figures, so it pays to be exact now.
What does each figure tell you?
Think of a small bakery. Revenue is everything customers were charged for bread and cakes. Cost of sales is what the bakery paid for the flour, butter and packaging that went into what it sold.
The gap between those two is gross profit. It shows whether the products themselves make money. Rent, wages, electricity and advertising are then taken off, and what is left is net profit.
How do you build the income statement, step by step?
- Write revenue from the figures supplied. If the question gives units and price, multiply them first.
- Subtract cost of sales to get gross profit.
- List the other expenses (rent, wages, utilities, marketing) and add them up.
- Subtract total expenses from gross profit to get net profit.
- Check the direction. Gross profit should be larger than net profit unless the business earns extra income below the line.
Worked example
Kedai Roti Sri Murni, a bakery in Ipoh, had these figures for its first year.
| Item | RM |
|---|---|
| Revenue | 240,000 |
| Cost of sales | 150,000 |
| Wages | 38,000 |
| Rent | 12,000 |
| Utilities | 6,000 |
| Marketing | 4,000 |
Step 1, gross profit: 240,000 − 150,000 = RM90,000.
Step 2, total expenses: 38,000 + 12,000 + 6,000 + 4,000 = RM60,000.
Step 3, net profit: 90,000 − 60,000 = RM30,000.
Step 4, margins as a check. Gross profit margin is 90,000 ÷ 240,000 × 100 = 37.5%. Net profit margin is 30,000 ÷ 240,000 × 100 = 12.5%. For every RM1 of sales, 37.5 sen is left after the cost of the goods, and 12.5 sen after everything.
The ratios tool shows the same trace with the numerator and denominator labelled, and it also separates margin from mark-up, which uses cost of sales as the base.
The mistake to watch for
A frequent slip is to subtract the running expenses from revenue and skip cost of sales.
Mistaken answer: 240,000 − 60,000 = RM180,000 “profit”.
The student treated the cost of the flour and butter as if it did not exist.
The correction is to work down the statement in order: revenue, cost of sales, gross profit, expenses, net profit. Each subtraction has its own line, and each line gets a label. If you cannot name the figure you just calculated, you are probably mixing two of them.
Check yourself
Try these on paper, then open each answer.
1. A stationery shop has revenue of RM80,000, cost of sales of RM52,000 and expenses of RM18,000. Find gross profit and net profit.
Show answer
Gross profit = 80,000 − 52,000 = RM28,000. Net profit = 28,000 − 18,000 = RM10,000.
2. For the same shop, calculate the gross profit margin and the net profit margin.
Show answer
Gross profit margin = 28,000 ÷ 80,000 × 100 = 35%. Net profit margin = 10,000 ÷ 80,000 × 100 = 12.5%.
3. A café has gross profit of RM45,000 and cost of sales of RM135,000. What is its revenue and gross profit margin?
Show answer
Revenue = gross profit + cost of sales = 45,000 + 135,000 = RM180,000. Gross profit margin = 45,000 ÷ 180,000 × 100 = 25%.
Where this leads next
With the three profit figures secure, move on to reading a statement of financial position, which shows what the business owns and owes at one date. The cash versus profit bridge is useful for seeing why a profitable month can still leave the bank balance short.
Check which statements and ratios your exam year expects on the Cambridge subject page, since 0450 and 0264 are worded differently. If you want a teacher to go through your own working line by line, our online one-to-one Business tuition is built for that kind of case work.