5.3 Income Statements Flashcards
How is profit calculated?
Profit = Sales revenue – Total costs
Profit is revenue minus costs usually calculated over the course of the year.
When is profit made?
A profit is made when sales revenue is greater than total costs for a given time period.
Explain the importance of profit for entrepreneurs.
profit rewards the risk and effort that starting a new business involves.
Explain the importance of profit for investors.
profit rewards the risk of investing in a new business.
Explain the Importance of profit to private sector businesses.
Profit is an important source of finance, retained profit can be used to pay for future capital investment in a business.
State the differences between profit and cash.
Cash can also include loans or capital invested in a business. Profit comes from revenue only.
How is cash calculated?
Cash is cash inflow minus cash outflow, usually calculated month by month.
How is gross profit calculated?
Gross Profit = Sales Revenue – Cost of sales
Cost of sales is the cost of materials used to make a product or service.
How do we increase gross profit?
We can increase gross profit by increasing sales revenue or reducing the cost of sales.
Does gross profit include all costs of a business?
No. The business will still have to pay expenses that aren’t included in cost of sales like electricity, insurance, salaries of staff and so on.
How do we calculate profit?
Profit = Gross profit – Expenses
How is retained profit calculated?
Retained Profit = Profit – Dividends
What is retained profit used to pay?
capital investment and expansion in the future.
