Chapter 3 Flashcards
What does the income statement show?
shows how much profit (or loss) has been generated over a particular period.
What is the equation underpinning the income statement?
Profit= total revenue for period - total expenses for period.
What is income?
Income is defined as increases in economic benefit from revenue, and gains during the period.
•There are two elements to income:
1. revenue, or sales income from trading, and
2. non-operating income — that is gains from transactions other than normal trading activity.
•Both types result in an increase in economic benefit to the business, which results in an increase in owner’s equity.
What is revenue with examples
what the business earns from the sale of goods or provision of services (normal trading activity).
Examples:
- Sales of goods (for example, by a manufacturer)
- Fees for services (for example, of a solicitor)
- Subscriptions (for example, of a club)
What is non- operating income with examples?
gains from transactions other than normal trading activity.
Examples:
-Interest income which is received
- Profits on disposal of non-current assets such as selling motor vehicles and equipment
What are expenses
They are decreases in economic benefits as a result of normal trading activity and losses during the period.
there are two elements to expenses: those arising from ordinary business, and non-operating losses from transactions other than normal trading activity. Both types result in a decrease in economic benefit to the business, which results in a decrease in equity.
Examples of operating expenses
•Cost of goods sold
•Insurance
•Light and heat
•Rent
•Wages and salaries
•Motor vehicle running expenses
Examples of non-operating expenses
•Interest expense on loans
•Losses on disposal of non-current assets
What is the format of the income statement
Gotta add this somehow?
What’s the difference between the income statement and the statement of financial position?
They perform different roles.
The statement of financial position sets out the wealth held by the business at a single moment in time, whereas the income statement is concerned with the flow of wealth (profit) over a period of time.
How to calculate part one of the income statement (Gross profit)
Gross profit = Revenues - Cost of sales
How to calculate operating profit? (Part 2 of the income statement)
Operating Profit = Gross Profit - Operating Expenses
Shows profit from operations
How to calculate net profit for the period (Part 3 of income statement)
Net profit = Operating profit
+ Non-operating income
- Non-operating expense
What are the uses of the income statement?
Helps in providing information on:
•financial performance;
•how and where profits might be increased;
•financial control.
What is the Accruals convention
Accruals convention: recognises revenues and expenses when they are accrued (i.e. earned or incurred) rather when the money is received or paid.
