5.3 – Income Statements Flashcards
What are Accounts?
The financial records of a firm’s transactions.
What are Final Accounts?
Prepared at the end of the financial year and give details of the profit or loss made as well as the worth of the business.
What is Profit?
Profit = Sales Revenue – Total cost
How to increase profit?
Increase sales revenue
Cut costs
Why is Profit Important?
Reward for enterprise - Successful entrepreneurs have many important qualities and characteristics and profit gives them a reward for these.
Reward for risk taking - Entrepreneurs and other investors take considerable risks when they provide capital to a business — profits reward them for taking these risks by allowing payments to be made (e.g. dividends to shareholders). These payments provide incentives: to business owners to try to make their business even more profitable; to investors to put more capital into profitable businesses.
Source of finance - Profits after payments to the owners (retained profits) are a very important source of finance for businesses — this allows for expansion
Indicator of success - When some businesses are very profitable, other businesses or new entrepreneurs are given a signal that investment into producing similar goods or services would be profitable. If all businesses in an industry are making losses, this would not be a good signal to set up in that industry!
What is a income statement?
A financial document of the business that records all income generated by the business as well as the costs incurred by the business and thus the profit or loss made over the financial year. Also known as profit and loss account.
What is Sales Revenue?
Total Sales
What is Cost of Sales?
Total variable cost of production + (opening inventory of finished goods – closing inventory of finished goods)
What is Gross Profit?
Sales Revenue – Cost of Sales
What are Expenses?
All overheads/fixed costs
What is Net Profit?
Gross Profit – Expenses
What is Profit After Tax?
Net Profit – Tax
What are Dividends?
Share of profit given to shareholders
What is Retained Profit for the Year?
Profit after Tax – Dividends. This retained earnings is then kept aside for use in the business.
What are the uses of Income Statements?
Income statements are used by managers to:
Know the profit/loss made by the business
Compare their performance with that of previous years’ and with that of competitors’.
Know the profitability of individual products by preparing separate income statement for each product.
Help decide what products to launch by preparing forecast income statement for the first few years.
