Chapter 10: Reporting for Profit (Part 2) Flashcards
How can an income statement be used by a business to assess its trading performance?
It can identify strong and weak areas of performance, allowing corrective action to be taken to improve profit in the following period
How can an income statement be used to plan for future trading activities?
It provides a basis for the next set of budgeted revenues and expenses, thus aiding in setting goals and targets for the future
What are some strategies that a business can use to generate more revenue?
- Increasing selling prices to generate greater revenue
- Decreasing selling prices to generate more sales
- Use targeted advertising to market strategically
- Implement strategies to manage inventory
- Improve customer service by training staff
What are some strategies that can be used to improve expense control?
- Changing ordering and handling procedures
- Finding cheaper alternative suppliers
- Changing staff management practices
- Finding better quality inventory to allow for increased selling prices
Why must ethical considerations be taken into account by business owners?
In order for the business to be socially and environmentally responsible within the community
What are some indicators that the net profit during a reporting period is too low?
It is lower than the drawings or wages amounts
Why is freight out reported as an other expense?
It is an expense because it decreases assets and decreases owners equity, however it is not a cost incurred when getting inventory into a condition or location ready for sale, thus cannot be reported under cost of goods sold
Why may an increase in other expenses lead to an increase in net profit?
Higher amounts of advertising could lead to higher sales due to the attraction of customers, as well as higher wages which could improve customer service and generate more sales
What does profitability refer to?
The ability of a business to earn profit as expressed in relative terms by comparing profit against a base such as sales, assets or owners equity
Why can financial indicators be useful in assessing profitability?
Financial indicators such as net profit/gross profit margin show dollar amounts as percentages, which allow for comparison against past performance, budgeted performance or competitors performance
What is net profit margin?
A profitability indicator that indicates expense control by calculating the percentage of net sales revenue that os retained as net profit
What is gross profit margin?
A profitability indicator that measures the average mark-up by calculating the percentage of net sales revenue that is retained as gross profit
What is the purpose of using graphical representations to communicate accounting information?
It allows for understandability to occur, as financial information is now presented clearly and concisely to all users
What is the purpose of preparing a line graph?
To represent changes in a particular item over time, which can lead to visual representations of financial information
What is the purpose of preparing a pie chart?
To represent the components of a particular item, such as the individual items that make up total expenses
