Income Statement Flashcards
What is the formula for net income
Net Income = (total revenue + gains) - (total expenses + losses)
What is the formula for total revenue
Operating + non-operating revenues
What key items does an income statement focus on
- Revenue
- Expenses
- Gains
- Losses
What does an income statement essentially show you
Gives an account of how the net revenue realised by the company gets transformed into net earnings (profit and loss)
What is operating revenue
this is revenue realised through primary activities
What are primary activities
This is the revenue achieved from the sale of the product/services
What is non-operating revenue
These are revenues realised through secondary non-core business activities
Where does non-operating revenue come from
From the earnings that are outside the purchase and sale of goods and services and may include income from interest earned on business capital lying in the bank, rental income from business property, income from strategic partnershipsxike royalty payment receipts or income from and ad display placed on business property
What are gains in an income statement
Also called other income
- Indicates the net money made from other activities like the sale of long-term assets including net income from one time non business activities like selling an old transport van etc.
What is the difference between revenue and receipts
Revenue:
- usually accounted for in the period when sales are made or services are delivered
Receipts:
- the cash received and are accounted for when the money is actually received
What is an expense
This is the cost for a business to continue operation and turn a profit
What are primary activity expenses
These are all the expenses incurred for earning the normal operating revenue linked to the primary activity of the business.
What are some things that make up the primary activity expenses
- Cost of goods sold (COGS)
- Selling, general and administrative expenses (SG&A)
- Depreciation or amortisation
- Research and development expenses
- Wages
- utilities bills etc
What are secondary activity expenses
All expenses linked to non-core business activities, like interest paid on loan money
What are losses as expenses
All expenses that go towards a loss-making sale of long term assets, one time or any other unusual costs, or expenses towards lawsuits.
What does the secondary revenue and expenses tell you about a company
Company’s involvement and its expertise in managing the ad-hoc, non core activities.
What might a substantially high-interest income from money lying in the bank indicate
The business may not be utilising the available cash to its full potential by expanding the production capacity or it is facing challenges in increasing ints market share amid competition
What may recurring rental income from hosting billboards at the company factory situated on a highway indicate
that the management is capitalising on the available resources and assets for additional profitability.
What is the formula for net income
Net Income = (revenue + gains) - (expenses + losses)
What are the 4 different measures of profitability that are used in a multi-step income statement
- Gross
- Operating
- Pre-tax
- Post-tax
Why do we use the 4 different measures of profitability in a multi-step income statement
Helps identify how the income and profitability are moving/changing from one level to the other.
What might a higher pre-tax profit and lower post-tax profit mean
This indicates loss of earnings to taxes and other one-time, unusual expenses
How is gross profit calculated
Deducting the cost of revenue from the total revenue
Why is it important to compare cost of revenue/total revenue between companies
This shows you the % of sales that goes into generating revenue for a company
