121 the income statement

Question 1

what does a profit and loss statement show

Answer 1

records the income and expenditure of an organsisation over the last year. by assessing this the business can see how much profit or loss they made

Question 2

what are the components of a profit and loss statement

Answer 2

sales revenue - total amount of money made by a business in a trading year from selling goods and/or services
costs of sales - these are the direct costs (usually variable costs) involved in making the sales revenue eg, paying for labour and raw materials/ stock
gross profit - sales - cost of sales
expenses - the costs that are not directly involved in the production process or the making of goods (usually they include fixed costs). eg.rent
net profit - gross profit- expenses

Question 3

what does net profit show

Answer 3

measures how efficiency a business manages its fixed costs and shows how efficient the business is overall as business revenue and expenses are included in the calculation (net profit= gross profit- expenses)

Question 4

what does gross profit show

Answer 4

measures the operational efficiency of a business , how good is the business at turning inputs into profitable outputs, show how efficiency the company generates profit from its direct costs. (gross profit= sales- cost of sales)

Question 5

how to improve net cash flow

Answer 5

• redundancies* - reduces staff wage costs as they have been removed from the business -> (A03) however increases short term costs as you have to make redundancy payment, loss of capacity in the long term
  relocating production abroad -reduces costs in the short term , wages and rent will be cheaper in another country -> (A03) however, it makes it harder to quality check products as it’s from a different country , market research needed -may not like the same product in another country
  increasing adverting - more people buy product because they know about it , should increase long term net profit due to greater brand awareness -> (A03) however , advertising expensive , depends on if advertising is effective

Question 6

evalaute usefulness of income statement to a business

Answer 6

• allows business to review performance in line with objectives outlined in business plan ->
  (+) can demonstrate if they are on track or not , if not them adapt strategies accordingly
  (-) usefulness depends on the accuracy of figures presented and realistic nature of goals
• identify any costs that might be higher than anticipated ->
  (+) take measures to adjust costs accordingly
  (-) depends on stability of external factors eg covid/interest rates

Question 7

increasing net profit

Answer 7

• increase sales revenue by increasing advertising - though this could cost more money.
- increase revenue by increasing prices - though this depends on elasticity and customer loyalty.
- reduce costs of sales by obtaining discounts from suppliers through negotiation and bulk buying
• reduce expenses, e.g. rent, wages, administrative costs, utility bills - though these changes could take time and affect quality of service— move one or more stores from the industrial estates if it would result in lower costs and/or more customers.