5.3 Income statements Flashcards
What are accounts?
The financial records of a firm’s transactions.
Who are accountants?
Professionally qualified people responsible for keeping accurate accounts and producing final accounts.
What are final accounts?
Accounts produced at the end of the financial year showing profit/loss and the worth of the business.
What is the simple equation for profit?
Profit = Sales revenue – total costs.
How can profit be increased?
By increasing sales revenue, reducing production costs, or a combination of both.
Why is profit important for private sector businesses?
It acts as a reward for risk-taking, a source of finance, and an indicator of success.
What does profit reward in the private sector?
Reward for enterprise and risk-taking.
How is profit a source of finance for businesses?
Profits after payments can be used to fund expansion.
What does profit show in the private sector?
That investing can be profitable or that investment should be avoided.
What is the difference between profit and cash?
Profit is derived from revenue, while cash can come from various sources like selling assets.
Why is profit important for public sector businesses?
It provides finance for developing state-owned businesses or improving efficiency.
Why is profit important for social enterprises?
To balance profit-making with their aims and ensure the firm’s survival.
What is an income statement?
A financial statement that records a business’s income and costs over time.
Who uses income statements?
Managers, banks, and investors to assess if a business is making a profit.
What are the main features of an income statement?
Revenue, cost of sales, gross profit, net profit, and retained profit.
What is revenue in an income statement?
The income from sales of goods and services.
How is revenue calculated?
Units sold × Price per unit.
What is the cost of sales in an income statement?
The cost of production or buying goods the business sells during a period.
How is the cost of sales calculated?
Opening inventories + Purchases – Closing inventories.
What is gross profit?
The profit made when revenue is greater than the cost of sales.
How is gross profit calculated?
Revenue – Cost of sales.
What is a trading account?
A section of the income statement that shows how gross profit is calculated.
What is net profit?
The profit made after deducting all costs from gross profit.
How is net profit calculated?
Gross profit – Overhead costs (Fixed costs).
