Chapter 2 - Financial Statements ( The statement of Profit or Loss )

Question 1

What is the a statement of profit or loss

Answer 1

This financial statement outlines whether a buisness is in profit or loss for a specific finanical period and not the buisness entire lifespan this is usually for a period of one year.

Question 2

Different Terms in a Statement of profit or loss

Answer 2

Revenue - The total made from the sale of goods before any deductions ( Price of good X Number of units sold )

Cost of sales - The cost incured from producing the goods/services e.g the cost of eggs,flour and butter for a cake. ( Price of production X Number of units sold )
Another key term is COGS ( Cost of goods sold )

Gross profit - Revenue - Cost of sales

Operating Expenitures - Any other costs involved in the running of the buisness e.g Electricity, Phone Bill , Delivery costs

Operating profit - Gross Profit - Operating expenditures

Question 3

What are the two financial reporting bodies ?

Answer 3

IFRS - Interational finanical reporting standards

UK GAAP - United Kingdom Generally accpeted accoutning principles

Question 4

Ratios derived from statement of profit or loss

What can they be used for ?

Answer 4

Gross profit margin = (Gross Profit / Revenue) X 100

Operating Profit margin = (Operating Profit / Revenue) X 100

These can be used as KPIs against other companies or industry standards to see how well the companies are performing plus to see if the buisness is cost effective.

Question 5

Cost of sales formula

Answer 5

Cost of sales = ( Beginning Inventory + New inventory ) - ending inventory