income statement theory

Question 1

Sales Revenue

Answer 1

Sales revenue is the income generated from the sales of the goods to customers during the trading period.

It represents the total value of the goods sold (units x selling price) not necessarily the sales revenue actually received.

Question 2

Sales Returns

Answer 2

Sales returns is the value of sales which have been returned back to the business from customers. This may be because the goods were faulty or the wrong goods/wrong quantity of goods were sent to customers.

Question 3

Net Sales Revenue

Answer 3

This is sales revenue - sales returns. It represents the net value of goods which have been sold to customers.

Question 4

Opening Inventory

Answer 4

This is the value of inventory left over from last year. We would try to sell this inventory first before buying in any new inventory.

Question 5

Purchases

Answer 5

This refers to the inventory bought during this accounting period. It will be included as part of the Cost of Sales calculation.

Question 6

Carriage Inwards

Answer 6

This refers to delivery charges and transport costs involved in getting the purchases from our suppliers to the business.

Question 7

Carriage Out

Answer 7

This refers to delivery charges and transport costs involved in getting the items you sold from the business to the customer.

Question 8

Closing Inventory

Answer 8

This is the unsold inventory that is left over at the end of the accounting period. This must be deducted as it does not belong in this year’s accounts but will belong in next year’s. The closing inventory for this year will become the opening inventory for next year.

Question 9

Gross Profit

Answer 9

The profit a business makes from the buying and selling of its inventory (stock). The business purchases goods at a certain price and sells the goods at a higher price. This is the profit before expenses are deducted.