Chapter 3 Reading Notes Flashcards
what is the primary purpose of businesses?
generating wealth (profit)
gross profit = ?
the amount remaining after the cost of sales has been deducted from trading revenue
operating profit = ?
the profit achieved during a period after all operating expenses have been deducted from revenues from operations
what are operating expenses also known as?
overheads
profit for the period = ?
the result when all expenses have been deducted for the period (including interest, taxes, depreciation & amortisation)
cost of sales = cost of goods sold
true or false?
true
how do you calculate cost of sales on an income statement?
opening inventories + purchases - closing inventories
what is the layout of an income statement?
cost of sales
=
gross profit
-
operating expenses
=
operating profit
-
non-operating expenses (e.g., interest)
+
non-operating income (e.g., interest)
=
profit for the period
what convention is used for recognising expenses?
the matching convention
what is the matching convention?
revenue and expenses should match the period in which they were earned/incurred
what is an accrued expense?
an expense that is outstanding at the end of the period
what is the materiality convention?
where amounts involved are immaterial, only what is convenient should be considered
what are prepaid expenses?
an expense that has been paid in advance
what is the accruals convention?
recognising cash when earned and expenses when incurred
what does GDP stand for?
gross domestic product
