5.3 Income statements

Question 1

What is profit?

Answer 1

a reward to business owners for the risk they take in investing their capital into the business

Question 2

What are profits used to?

Answer 2

Measure success of a business
Measure performance of managers
Decide whether or not to continue making or selling a product
Finance purchase of non-current assets, expand business etc.
Attract investors who will provide additional funds for business

Question 3

Gross profit?

Answer 3

Revenue - cost of sales

Question 4

Profit?

Answer 4

Revenue - total sales

Question 5

Retained profit?

Answer 5

Profit after expenses, taxes and dividends have been paid. Profit that is ploughed back into the business

Question 6

Revenue

Answer 6

selling price * quantity sold

Question 7

What are the differences between profit and cash?

Answer 7

Money invested in businesses increases cash but not profit
Capital expenditure decreases cash but does not decrease profit

Cash is important for the business at all times
Profit is more important for the long-term success of the business

Question 8

What is an ‘income statement’?

Answer 8

Financial record of the business’s profits, costs and revenue over a given period of time

Question 9

Shareholders/owners

Answer 9

Profit after tax belongs to the owner/shareholders
→ see how much they earned for their investment in business

Question 10

Employees

Answer 10

High profit increases job security
Employees might expect to receive a good pay rise if a business is making good levels of profit
Some businesses have profit-sharing schemes, so high profits means high shares of profits for employees

Question 11

Lenders

Answer 11

hey want to be sure that profit is enough to pay interest on loans
Is business earning enough profit to be able to repay loans when due?

Question 12

Government

Answer 12

Higher the profit, the more tax the government will receive

Question 13

Suppliers

Answer 13

A firm that is profitable will continue to purchase raw materials and other supplies, which helps supplier earn profit

Question 14

Managers

Answer 14

They can compare profit from one year to next or with competitor’s profits to measure performance of business
Retained profit is an important source of finance for businesses

Question 15

Shareholders

Answer 15

Usually higher the profit higher the dividend payment
Market value of shares will often rise or fall depending on high or low profits earned

Question 16

What are ‘shareholder’s funds’?

Answer 16

Funds/money invested into the business by the owners

Question 17

What is a ‘balance sheet’?

Answer 17

an accounting statement that records owner’s equity, assets and liabilities of a business at a particular date

Question 18

What are ‘assets’?

Answer 18

resources owned by the business

Question 19

What are ‘liabilities’?

Answer 19

debts and payments that will have to be paid in the future

Question 20

What are ‘current assets’?

Answer 20

resources that a business expects to turn to cash before the date of the next balance sheet

Question 21

What are ‘non-current assets’?

Answer 21

resources that a business does not expect to turn into cash within a year

Question 22

What are ‘current liabilities’?

Answer 22

debts and payments a business expects to pay before the date of the next balance sheet

Question 23

What are ‘non-current liabilities’?

Answer 23

debts and payments business expects to pay after more than a year

Question 24

What is ‘owner’s equity’?

Answer 24

money a business owes to its investors which includes capital and retained profit