IGCSE Business: Profit and loss and Statement of financial position (Cambridge 0264)

This guide covers sections 5.3 (Profit and loss) and 5.4 (Statement of financial position) of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029. Both papers are based on all the subject content, so these ideas can appear in a short answer, a data response or a case study. The syllabus says you will not be assessed on constructing a statement of profit or loss or a statement of financial position. You are expected to read them, calculate from them and use them to make decisions.

Next, use the revision notes and the practice questions. The course hub, the printable checklist and the free diagnostics show what to revise next. All money in this guide is in dollars. Every business is invented.

What this unit covers

Syllabus section	What you must be able to do
5.3.1 What is profit and why it is important	Say what profit is. Explain why profit matters to private sector businesses: reward for risk-taking, source of finance, measure of success, attract investors
5.3.2 Statement of profit or loss	Know the main features: revenue, cost of sales, gross profit, expenses, profit. Make simple calculations with them. Make decisions from simple statements
5.4.1 The main elements of a statement of financial position	Know non-current assets, current assets, non-current liabilities, current liabilities and the concept of capital employed. Calculate total assets, total liabilities and working capital. Make decisions from simple statements

5.3.1 What profit is and why it matters

Profit is what is left when a business takes its total costs away from its revenue. The syllabus formula is:

Profit = total revenue - total costs

If costs are larger than revenue the result is negative. That is a loss. Profit is also not the same as cash. A business can record a profit and still run short of cash, for example when customers have not yet paid.

The syllabus lists four reasons why profit is important to private sector businesses. Learn them as four separate points.

Reason	What it means	Short example
Reward for risk-taking	Owners put money in without any promise of getting it back. Profit pays them for taking that risk	An owner who invests savings in a workshop expects a return that a bank deposit would not give
Source of finance	Profit that is kept in the business (retained profit) can pay for new equipment or stock without borrowing	A shop uses last year’s profit to fit new shelving, so it pays no interest
Measure of success	Profit shows whether the business is earning more than it spends. Owners can compare it across years	Profit of 9,800 compared with 14,000 the year before shows a decline
Attract investors	People with money to invest look for businesses likely to pay a return	A business with rising profit finds it easier to sell shares or to persuade a partner to join

Do not write “profit is important because the business needs money”. Say which of the four reasons you mean and link it to the business in the question.

5.3.2 The statement of profit or loss

The statement of profit or loss records the money a business earned and spent over a period, usually a year. Its main features are in the order below.

Line	Meaning	How it is found
Revenue	Value of goods or services sold	Selling price per unit x number of units sold
Cost of sales	Cost of the goods that were sold (materials, bought-in goods and similar direct costs)	Given in the statement
Gross profit	What is left after the cost of sales	Revenue - cost of sales
Expenses	Other running costs such as wages, rent, advertising and utilities	Added up from the list
Profit	What is left after all costs	Gross profit - expenses

The syllabus gives profit in two forms: total revenue - total costs, or gross profit - expenses. They give the same answer, because total costs are cost of sales plus expenses.

Worked example 1: reading a statement

Cullinane Cycles sold 600 bicycles in its first year at 240 each. A year later it sold 720 at the same price. Its figures are below.

Line	Year 1	Year 2
Revenue	144,000	172,800
Cost of sales	88,000	113,000
Gross profit	56,000	59,800
Wages	24,000	30,000
Rent	9,000	10,000
Advertising	5,000	6,000
Other expenses	4,000	4,000
Total expenses	42,000	50,000
Profit	14,000	9,800

Check the working. Year 1 revenue is 600 x 240 = 144,000. Gross profit is 144,000 - 88,000 = 56,000. Expenses are 24,000 + 9,000 + 5,000 + 4,000 = 42,000. Profit is 56,000 - 42,000 = 14,000. For year 2, revenue is 720 x 240 = 172,800, gross profit 59,800, expenses 50,000 and profit 9,800.

Decision from the statement. Revenue rose by 20%, which looks like good news. Cost of sales rose by about 28%, so gross profit rose by only about 7%. Expenses rose by about 19%. Profit fell by 4,200, which is a fall of 30%. A manager should look for the cause. Cost of sales rising faster than revenue suggests that bought-in parts cost more, or that discounts were given. The manager could look for a cheaper supplier, raise the price or check the rise in wages.

The lesson is that rising revenue does not guarantee rising profit. Compare each line, not just the top one.

Worked example 2: finding a missing figure

Fernsby Laundry charges 12 per wash and completed 9,500 washes. Revenue is 12 x 9,500 = 114,000. The cost of sales was 45,600 and expenses were 52,000.

• Gross profit = 114,000 - 45,600 = 68,400.
• Profit = 68,400 - 52,000 = 16,400.

Now work backwards. In another year the laundry had revenue of 81,000, expenses of 31,000 and a profit of 9,800.

• Gross profit = profit + expenses = 9,800 + 31,000 = 40,800.
• Cost of sales = revenue - gross profit = 81,000 - 40,800 = 40,200.

Use the same two formulas and rearrange them.

Making decisions from a statement of profit or loss

Decisions need evidence. Use figures from the statement, then say what they mean.

• Compare years, or compare planned and actual figures. Say which lines moved most.
• If gross profit is low, the cause is revenue (price or volume) or cost of sales. Possible actions are a higher price or a different supplier.
• If gross profit is healthy but profit is low, expenses are the problem. Look for savings in rent, wages or advertising.
• A fall in profit may make investors or lenders cautious. A rise may support a plan to expand or to pay owners a return.
• Remember what the statement leaves out: it does not show cash, borrowing or what the business owns.

5.4.1 The statement of financial position

The statement of financial position is a snapshot of a business on one date. It lists what the business owns (assets) and what it owes (liabilities). Profit comes from a different statement. Both are needed.

Element	Meaning	Examples in the syllabus
Non-current assets	Items owned that the business expects to keep for more than a year	Property (land and buildings), machinery
Current assets	Items owned that are cash or expected to become cash within a year	Inventory, trade receivables, cash
Non-current liabilities	Amounts owed that are due after more than a year	Bank loans
Current liabilities	Amounts owed that are due within a year	Trade payables, overdraft

Trade receivables are money owed to the business by customers who bought on credit. Trade payables are money the business owes to suppliers. Mixing these two up is a common slip.

Calculations

Measure	Form	Source
Total assets	Non-current assets + current assets	Standard form
Total liabilities	Current liabilities + non-current liabilities	Standard form
Working capital	Current assets - current liabilities	Given in the syllabus formulae
Capital employed	Total assets - current liabilities	Standard form (the syllabus names the concept but does not print the formula)

Working capital is the money available to run the business day to day. If it is negative, the business may struggle to pay what it owes in the next year.

Capital employed is the long-term money invested in the business. It equals non-current liabilities plus the owners’ funds (equity). Both ways of finding it give the same answer, which the example below shows.

Worked example 3: calculating from a statement

Pennyfeather Pottery has this statement of financial position.

Item	Year 1	Year 2
Property	120,000	120,000
Machinery	45,000	70,000
Total non-current assets	165,000	190,000
Inventory	18,000	22,000
Trade receivables	9,000	15,000
Cash	6,000	2,000
Total current assets	33,000	39,000
Trade payables	14,000	20,000
Overdraft	7,000	31,000
Total current liabilities	21,000	51,000
Bank loan (non-current)	60,000	60,000

Year 1:

• Total assets = 165,000 + 33,000 = 198,000.
• Total liabilities = 21,000 + 60,000 = 81,000.
• Working capital = 33,000 - 21,000 = 12,000.
• Capital employed = 198,000 - 21,000 = 177,000.
• Check: total assets - total liabilities = 117,000 is the owners’ funds. Adding the bank loan of 60,000 gives 177,000.

Year 2:

• Total assets = 190,000 + 39,000 = 229,000.
• Total liabilities = 51,000 + 60,000 = 111,000.
• Working capital = 39,000 - 51,000 = -12,000.
• Capital employed = 229,000 - 51,000 = 178,000.

Decision from the statement. Capital employed hardly changed, but working capital fell from positive 12,000 to negative 12,000. The business bought machinery worth 25,000 and paid for much of it by raising the overdraft by 24,000. Cash is only 2,000, while 51,000 is due within a year. The owner should be concerned about paying suppliers on time. Possible actions are to chase customers who owe 15,000, to arrange a longer-term loan in place of the overdraft, or to reduce inventory.

Making decisions from a statement of financial position

• Compare current assets with current liabilities. A large gap in favour of liabilities signals a short-term problem.
• Look at how the business finances itself: a heavy reliance on loans and overdraft means large repayments and interest.
• Check what changed between dates and why. New non-current assets can improve capacity, but how they were paid for matters.
• A lender or supplier may use the same figures to decide whether the business is safe to lend to or to supply on credit.
• A statement of financial position shows one date only. It says nothing about the profit earned in the year.

Common errors

• Writing “profit = revenue - cost of sales”. That is gross profit. Profit also deducts expenses.
• Treating revenue and profit as the same thing.
• Putting an overdraft among non-current liabilities. It is a current liability in the syllabus list.
• Calling inventory a non-current asset. It is a current asset.
• Subtracting total liabilities from current assets to find working capital. Use current liabilities only.
• Giving a number with no comment. In a decision question, say what the figure shows and what the business should do.

Frequently asked questions

Do you have to construct a statement of profit or loss in Cambridge IGCSE Business 0264? No. The syllabus says you will not be assessed on constructing a statement of profit or loss or a statement of financial position. You need to know their main features, make simple calculations with them and make decisions from them.

What is the difference between trade receivables and trade payables? Trade receivables are money owed to the business by customers who bought on credit, and they are a current asset. Trade payables are money the business owes to its suppliers, and they are a current liability.

How do you calculate capital employed? Capital employed = total assets − current liabilities. It equals non-current liabilities plus the owners’ funds, and the syllabus names the concept without printing the formula, so this is the standard form.

Why can profit fall even when revenue rises? If cost of sales or expenses rise faster than revenue, profit can fall. That is why you should compare each line of the statement, not just revenue at the top.

Is inventory a current or non-current asset? Inventory is a current asset, because it is expected to become cash within a year. Non-current assets are items kept for more than a year, such as property and machinery.

Official syllabus

This guide follows the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, published by Cambridge University Press and Assessment. Sections 5.3 and 5.4 are in the topic “Financial information and decisions”.