Income Statement Flashcards
what are income statements?
they give a historic view of the business’s trading income and expenditure over the previous 12 months
what does the trading account show?
what the sales of the business have been and the direct costs of making those sales - known as cost of sales
what is opening stock?
the stock the business has at the start of the year
how to workout cost of sales?
opening stock + purchases - closing stock
how to workout gross profit?
revenue/trading income - cost of sales
what is gross profit an indicator of?
how efficiently the business is at making and selling its product
what does the net profit figure tell us?
the actual profits after all the costs have been paid
how to workout net profit?
gross profit - total expenses
what are the three stages of an income statement?
the trading account
the profit and loss account
apportionment account
what does apportion mean?
to share
how to workout profit after tax?
net profit - tax
how to workout retained profits?
profit after tax - dividends
how will a sole trader’s income statement be different to public and private limited companies?
more straightforward and may not be an apportionment account as all profit goes straight to sole trader
how can a business improve its profits by increasing the selling price of products? give a why, a will it work and why it may not work.
why -
higher selling price = higher sales assuming quantity sold doesn’t fall
maximises value extracted from consumers
consumers may perceive product as high quality
no need to extra production capacity
work? -
depend on price elasticity of demand
if customers stay loyal and perceive product as good value
not work? -
competitors likely to respond
customers may switch to competitors
how can a business improve its profits by having special offers on products? give a why, a will it work and why it may not work.
why -
properly marketed discounts create special buying opportunity in customers minds, spurring them to action
may buy more than needed
work? -
way of promoting new good
receive attention on new goods people may not usually buy and getting rid of old stock
not work? -
good strategy if it doesn’t impair long term profitability - it often does
how much profit can be lost now that customers pay less to what they could’ve paid in full
competition may respond
may affect perceptions about value/quality of good
how can a business improve its profits by increasing
advertising? give a why, a will it work and why it may not work.
why -
generates more sales and future profits
increases awareness of good
to build demand, must be able to reach new audiences
change consumers’ perception
work? -
consumers can be persuaded to buy
inform consumers with control of message
not work? -
expensive
advertising by itself not effective to increase in sales
impersonal
how can a business improve its profits by increasing output? give a why, a will it work and why it may not work.
why -
greater quantity of product sold
enables businesses to maximise share of market demand
spreads fixed costs over greater number of units
work?
yes if extra output can be sold eg finding new market, offering lower price
yes is business has spare capacity
not work? -
what if demand not there?
fixed costs may rise
production quality may be lowered due to rush to produce more
how can a business improve its profits by reducing variable cost per unit? give a why, a will it work and why it may not work.
why -
increase value to each unit sold
higher profit margin for each product
customers do not notice change in price
work? -
yes if suppliers persuaded to offer better prices
yes if quality can be improved through lower wastage
yes if operations organised more efficiently
not work? -
lower input costs may mean lower quality inputs which can increase wastage
customers may notice decrease in quality
how can a business improve its profits by reducing wages? give a why, a will it work and why it may not work.
why -
may have too many employees, productivity levels could be higher
too many middle managers
be sure they are in line with current trends
work? -
reducing wages increases profitability only if sales price and number of sales remain constant or else company may have to lower prices due to cost reductions and low quality products to maintain same level of sales
staff may increase productivity to achieve bonuses
not work? -
staff may become demotivated
could result in higher staff turnover and may lose core employees
how can a business improve its profits by buying in bulk? give a why, a will it work and why it may not work.
why -
gaining purchasing economies of scale
receive bigger discounts
reduce admin costs
work -
if space is available/unused
depends on type of good otherwise spoilage
allow firms to meet unexpected increase in demand
not work -
affect cash flow with upfront fees
excess stock
expired shelf life may increase waste
how can a business improve its profits by using just-in-time production? give a why, a will it work and why it may not work.
means not holding much stock so saving money from paying for stock that may not be needed
why -
lower investment in inventory
reduced space required to store inventory
simplification of costing system
work -
reduced risk of defective and obsolete inventory
reduced manufacturing costs
not work -
place smaller orders more frequently
supplier may need to increase the cost per order to cover their costs
how can a business improve its profits by reducing advertising? give a why, a will it work and why it may not work.
why -
no direct link that advertising increases sales
free up cash flow without reducing quality
work -
yes there are free methods of advertising and may be more accurate in reaching target market
not work -
competitors still advertise
fail to reach new target customers
how can a business improve its profits by reducing fixed costs? give a why, a will it work and why it may not work.
why -
higher profits immediately
reduces break-even output
substantial savings made by cutting unnecessary overheads
work -
yes provided costs cut don’t affect quality, customer service or output
business can nearly always find savings in overheads
not work -
may reduce ability of business to increase sales
intangible costs may lower morale after making redundancies
what are 3 strengths of income statements?
can measure success of business compared with previous years/other businesses
enables owners and managers to plan ahead therefore helping in the management decision making
provides info. for stakeholders
what are three limitations of income statements?
performance of business can’t be judged from one year figures of income statement and must be judged from other years to see progress
financial accounts can be ‘window dressed’ meaning profits can look lower or higher on purpose for reasons and a low estimate can be put on depreciation and assets sold off
many other factors a firm must take into account when assessing financial performance
what two factors should be considered when making a judgement on how well a business is doing?
has new management pushed up pricing, boosting profit short term bu at a cost of reduced market share in the long term?
is a business which pollutes the environment, used materials from unsustainable sources but makes a large profit, a successful business?
