5.3 Income statements

Question 1

Reasons for profit/loss account

Answer 1

• legal requirement
• sums up the performance of a business to its stakeholders
• can be compared with the previous year’s performance
• investors or lenders need to see one before making deals
• forecast future profits and helps with planning

Question 2

3 section of income statement

Answer 2

1. TRADING ACCOUNTS
   revenue
   gross profit
2. PROFIT/LOSS ACCOUNTS
   total expenses
   operating costs
   net profit before tax

3. APPROPRIATE ACCOUNT
net profit before tax
income/corporation tax
profit after tax
devident 
retained profit

Question 3

3 section of income statement

Answer 3

1. TRADING ACCOUNTS - income earned by the business over a trading period
   - Revenue
   - Gross profit
2. PROFIT/LOSS ACCOUNTS
   - Total expenses
   - operating costs
   - net profit before tax
3. APPROPRIATE ACCOUNT - the uses of net profit after taxation
   - net profit before tax
   - income/corporation tax
   - profit after tax
   - devident
   - retained profit

Question 4

the content of an income statement (basic)

Answer 4

1. sales revues
2. cost of good sold
3. gross profit
4. expenses
5. net profit

Question 5

what is capital expenditure

Answer 5

spending on acquiring/ maintaining fixed assets, such as land, machinery

Question 6

what is Revenue expenditure

Answer 6

spending on current day-to-day expenses
purchase of raw materials
payment of wages

Question 7

stakeholder and their interest in income statement

Answer 7

Owners/ shareholders

• Profit after tax belongs to the owner/shareholders. They can see how much they have earned for their investment in the business

Shareholders

• profit links to devident
• The market value of shares will often rise or fall depending on high or low profits earned

Employees

• profit links to 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

Lenders

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

Government
- profit links to tax the government will receive

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

Managers

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

Question 8

calculation profitability ratio

Answer 8

gross profit margin = gross profit / sale

net profit margin = net profit / sale