9 - Income Statements Flashcards
What is meant by an “income statement”?
A business’s financial performance over a period of time
What financial concepts do income statements show?
Revenue, costs and profits of a firm
What 2 types of accounts are the main components of an income statement?
Profit/loss account
Trade accounts
What expenses do a profit and loss account include? What is the profit term for this?
Expenses that aren’t related to making and selling
Net profit
What are some other expenses included in a profit and loss account?
Rent, advertising and depreciation
What is the formula for “Operating Profit”?
Gross Profit - Expenses
What is the formula for “Net Profit”?
Total Revenue - Total Costs
What is meant by “net profit”?
The amount leftover after all costs have been taken away
What group of people will frequently use financial statements?
Stakeholders
Why are “profit margins” an important firm measure?
It determines if a firm has the potential to be profitable
What does the gross profit margin show?
The margin with only direct costs included
What does it mean when a firm’s gross profit is low?
It is a worrying sign for the firm
What is important to analyse when a gross profit margin is positive but a net profit margin is negative?
What expenses are the largest and causing this difference
Why is it good to compare financial performance with competitors?
It gives a good indication of whether or not the firm is doing well
How might a firm seem profitable? What might show how low these margins are?
High profit margins
Comparison to competitors
