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How do businesses measure their financial performance using statements and ratios?

Financial statements and performance: the income statement, gross profit and net profit, profitability ratios including gross profit margin and net profit margin, and using financial information to judge performance.

A focused answer to the WJEC GCSE Business content on financial statements and performance, covering the income statement, gross and net profit, profitability ratios such as gross and net profit margin, and using financial information to judge performance.

Generated by Claude Opus 4.813 min answerUpdated 2026-06-15

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

An income statement (also called the profit and loss account) shows how much profit a business made over a period, usually a year. It starts with revenue (sales), takes away the cost of sales (the direct cost of making or buying the goods sold) to give gross profit, then takes away the other expenses or overheads (such as rent, salaries and marketing) to give net profit. Gross profit is the profit before overheads; net profit is the profit after all costs and is the truer measure of success. To judge performance, businesses use profitability ratios that turn these figures into percentages, so different-sized firms and different years can be compared. The gross profit margin is gross profit as a percentage of revenue, showing how much of each pound of sales is left after the cost of the goods. The net profit margin is net profit as a percentage of revenue, showing how much of each pound of sales becomes profit after all costs. The higher the margins, the more profitable the business. By comparing margins over time or against rivals, a business can see whether its profitability is improving or worsening and decide whether to cut costs, raise prices or boost sales. Ratios are useful but should be read alongside other information, because one figure never tells the whole story.

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What this dot point is asking
The income statement
Profitability ratios
Using financial information
Why this matters
Try this

What this dot point is asking

WJEC wants you to read and use financial statements to judge performance. You need the income statement (the profit and loss account), the difference between gross profit and net profit, the main profitability ratios (the gross profit margin and the net profit margin), and how to use financial information to judge how well a business is doing. These build on revenue, costs and profit and let you compare performance over time or against rivals.

The income statement

Net profit is the truer measure of success, because it counts all the costs.

Profitability ratios

Using financial information

Ratios are useful but should be read alongside other information, because a single figure never tells the whole story.

Why this matters

Financial statements and ratios show whether a business is meeting its profit aims, so they link to aims and objectives (profit and growth targets), to sources of finance (lenders and investors study the statements), and to revenue, costs and profit (the figures the statements are built from). A falling margin is an early warning. Exam questions reward calculating gross and net profit and the margins, then interpreting what the numbers mean and what the business should do.

Calculate profits and the profit margins

A business has revenue of 250,000, cost of sales of 150,000 and other expenses of 60,000.

step Calculate gross profit and net profit

\text{Gross profit} = 250{,}000 - 150{,}000 = 100{,}000.

\text{Net profit} = 100{,}000 - 60{,}000 = 40{,}000.

step Calculate the gross profit margin

\text{Gross profit margin} = \frac{100{,}000}{250{,}000} \times 100 = 40\%.

step Calculate the net profit margin and interpret

\text{Net profit margin} = \frac{40{,}000}{250{,}000} \times 100 = 16\%.

The business keeps 40p of gross profit and 16p of net profit out of every pound of sales. The gap between the two margins (40 percent down to 16 percent) is taken up by the overheads, so if the net margin is too low the business should look at cutting those expenses. Turning the profits into percentages lets the firm compare this year with last year or with rivals, which the raw profit figures alone cannot do.

Try this

Q1. Revenue is 80,000 and cost of sales is 50,000. Calculate the gross profit. [1 mark]

Cue. $80{,}000 - 50{,}000 = 30{,}000$ .

Q2. Net profit is 24,000 and revenue is 120,000. Calculate the net profit margin. [2 marks]

Cue. $\frac{24{,}000}{120{,}000} \times 100 = 20\%$ .

Exam-style practice questions

Practice questions written in the style of WJEC exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

WJEC (Unit 1)3 marksA business has revenue of 200,000, cost of sales of 120,000 and other expenses of 50,000. Calculate its gross profit and its net profit. Show your working.

Show worked answer →

A 3-mark AO2 calculation. Gross profit is revenue minus cost of sales: $200{,}000 - 120{,}000 = 80{,}000$ . Net profit is gross profit minus other expenses (overheads): $80{,}000 - 50{,}000 = 30{,}000$ . Markers award marks for the gross profit, the method (gross profit minus expenses) and the net profit of 30,000. A common error is to subtract the expenses from revenue instead of from gross profit, or to confuse the two profits.

WJEC (Unit 1)6 marksA business has a net profit margin of 8 percent this year, down from 12 percent last year. Analyse what this tells the business and what it could do.

Show worked answer →

A 6-mark AO2 and AO3 question. Interpret the figures and suggest action.

What it tells the business: the net profit margin has fallen from 12 to 8 percent, so the business now keeps less net profit out of every pound of sales than it did last year. This suggests its costs (cost of sales or expenses) have risen faster than its revenue, or it has cut its prices, so its profitability has worsened.

What it could do: it could try to reduce its costs (cheaper suppliers, less waste, lower overheads) or raise its prices or sales, so that more of each pound of revenue becomes profit.

Chain and judgement: a falling margin is a warning that profitability is weakening, so the business should find why costs have risen or prices fallen and act, though raising prices risks losing customers, so cutting costs may be safer. Markers reward interpreting the fall plus developed, sensible actions.

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Sources & how we know this

WJEC GCSE Business specification (Wales) — WJEC (2025)
WJEC GCSE Business (Wales) specification (3510) — WJEC (2017)