Chapter 10 - Reporting for profit

Question 1

Net Profit Formula

Answer 1

Net profit = Revenues less Expenses

Question 2

Closing the ledger definition

Answer 2

transferring balances from revenue and expenses ledgers accounts to the Profit and Loss Summary account so that profit may be calculated

Question 3

Profit and Loss Summary Ledger explained

Answer 3

a General Ledger account that is used to summarise revenues and expenses so that profit can be calculated

Question 4

Do revenues need to be debited or credited to the P/L summary

Answer 4

Revenues have a credit balance and thus need to be debited to the P/L summary, with the exception of sales return

Question 5

Do expenses need to be debited or credited to the P/L summary

Answer 5

Expenses have a Debit balance and this need to be credited to the P/L summary

Question 6

If a profit is earned which side of the P/L Summary ledger will it go in

Answer 6

It will go on the LHS (debit side) to represent the increase in owner’s equity in the capital account

Question 7

Income Statement Defintion

Answer 7

An Accounting report that details the revenues earned and expenses incurred during the current period

Question 8

What does the Revenue heading represent in the IS

Answer 8

List the revenues as earned as a direct result of selling inventory

Question 9

What does the Cost of Goods sold heading represent in the IS

Answer 9

All the cost incurred in getting goods into a condition and location ready for sale

Question 10

What does the heading Gross Profit represent in the IS

Answer 10

Represents the difference between revenues and cost of goods sold, indicating the mark-up of the business

Question 11

What are common uses for the Income Statement

Answer 11

• Assess the firm’s performance against its revenue and expenses targets
• Plan for future trading activities
• calculate financial indicators to support analysis and interpretation

Question 12

Strategies to earn Revenue

Answer 12

• Change selling prices
• Market strategically and effectively
• Implement strategies to manage inventory
• Move to a better location
• Improve Customer service

Question 13

Strategies to control expenses

Answer 13

• Change Inventory management practices
• Change staff management practices
• Change NCA management practices

Question 14

How is Net Profit margin calculated

Answer 14

Net Profit/Net Sales * 100

Question 15

How is Gross Profit Margin Calculated

Answer 15

Gross Profit/Net Sales* 100