Income statement

Question 1

What is the purpose of an income statement?

Answer 1

Reports the profitability of the company’ operations over time
shows net profit/loss

Question 2

What is profit used for?

Answer 2

Pay dividends to stockholders
keep for retained earnings for furture growth

Question 3

Why is the statement of profit and loss useful

Answer 3

Performance in last period
Basis for predicting future performance
Assess the risk of future cash flow

Question 4

What is the accrual concept?

Answer 4

Recognised as earned/ incurred rather than money being paid
- in accordance to IFRS

Question 5

What is cash-basis accounting

Answer 5

Revenues and expenses are recognised when cash is received/ paid

Question 6

How should a prepayment be noted in income statement

Answer 6

As an asset that is already paid

Question 7

What are cost of sales

Answer 7

Direct cost incurred for good sold

Question 8

Operating expenses

Answer 8

All other expenses incurred for trade
e.g rent, wages, stationery

Question 9

What is the straight-line method of depreciation?

Answer 9

Loss of value is spread evenly each year

Question 10

What is the reducing balance method of depreciation?

Answer 10

Working out the depreciation charge as a percentage each year

Question 11

How to work out gross profit?

Answer 11

Revenue - Direct costs/Cost of sales

Question 12

How to work out the Gross profit Margin?

Answer 12

Product of sales - Cost of sales
Divided by product of sales
x 100

Question 13

How to work out cost of sales/direct costs?

Answer 13

Open inventory + Purchases
- Closing inventory

Question 14

What is the basic layout for an Income statement?

Answer 14

Revenue (Sales returns)
Direct costs (Opening inventory, Purchases, Closing inventory)
= GROSS PROFIT

Indirect costs
= OPERATING PROFIT

Interest expenses and tax
= NET PROFIT

Question 15

Direct expenses

Answer 15

Involved in the production of product/ Variable cost
e.g Cost of sales

Question 16

Indirect expenses

Answer 16

Not directly involved
e.g overheads, salary

Question 17

How to work out opening inventory?

Answer 17

Just the closing inventory from previous month

Question 18

Where does the opening inventory fall under the income statement?

Answer 18

Cost of sales
Positive

Question 19

Where do the purchases fall under the income statement?

Answer 19

Cost of sales
Positive

Question 20

Where does the closing inventory fall under the income statement?

Answer 20

Cost of sales
NEgative

Question 21

Where do the sale returns fall under the income statement?

Answer 21

Revenue
Positive

Question 22

Where do the purchase returns fall under the income statement?

Answer 22

Cost of sales
Negative

Question 23

Where should import duties fall under the income statement?

Answer 23

Cost of sales

Question 24

How to show that you have final figure?

Answer 24

Outline final figure