financial accounting - income statements

Question 1

explain what is meant by an income statement?

Answer 1

reports the level of profit or loss that a business has made in a given period of time

Question 2

explain what is contained in an income statement?

Answer 2

• revenue
• cost of sales
• gross profit
• expenses
• operating (net) profit
• finance costs
• profit before tax
• tax and dividends
• profit for the year

Question 3

how to calculate gross profit?

Answer 3

sales revenue - cost of sales

Question 4

how to calculate net profit?

Answer 4

gross profit - expenses

Question 5

how are income statements useful?

Answer 5

• enables the business to make decisions –> profit affects future decisions
• management can cause IS to monitor progress of business in terms of targets - comparisons
• can calculate useful ratios
• help formulate objectives for future
• provides stakeholders with info (e.g. banks, investors, suppliers)