Chapter 24: Income statements Flashcards
What are accounts
The financial records of a firm’s transaction
What is the final account
produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business
Profit formula
how to increase
Profit = Revenue - Cost of making products
increase profit:
either increase revenue
decrease costs
or do both
4 reasons why profit is important
Reward for risk-taking
Reward for enterprise
Source of finance
Indicator of sucess
Why is profit a reward for enterprise and risk taking (2 sep reasons)
Enterprise - Rewards the entrepreneur for their many important characteristics and qualities to develop a successful business
Risk taking - Rewards on taking the risk to start or invest into the business. In addition they provide an incentive to business owners to make the business even more profitable or investors to put more capital.
Why is profit an important source of finance
which profit
Retained profits are a good source of finance. They are debt free and interest free source of finance the business can use to expand production
How is profit an indicator of success
If an existing business is highly profitable, it indicates to other entrepreneurs and businesses that there is potential in that industry. If the existing businesses were making losses then it would not be a good signal to set up in that industry.
What is an income statement
aka
A financial statement that records the income of a business and all costs incurred to earn that income over a period of time.
aka profit and loss account
What is the cost of sales
The total variable cost of production for the goods and services sold by the business. Doesn’t include fixed cost expenses.
What is gross profit
formula
Gross profit = Revenue - Cost of sales
profit calculated before fixed costs are considered
What is depreciation
the fall in the value of a fixed asset over time.
Each year the fall in value of the asset/depreciation is recorded as in expense to the firm
What is net profit
formula
what is non-trading income
Profit made by a business after all costs have been deducted from the gross profit. Also adds all non-trading income to the gross profit
Net profit = Gross profit ( + non trading income) - Fixed costs
Any income of the business that is not generated by the direct operations of the business but by something else. Eg: rent from an apartment above the retail shop. The shop’s operations are to sell the product but they also generate income from the apartment’s income.
What is retained profit
formula
Profit left after all payments have been deducted including interest, taxes, and dividends
Retained profits = Net Profit - Interest on debt - Cooperate tax - Dividends to shareholders
