INCOME STATEMENTS Flashcards
What is an income statement
A formal financial document that shows the value of a firm’s revenue over one year and the costs involved in generating that income. It shows weather a business has made a profit or loss (it usually is yearly)
What are the details of an income statement
Revenues: The total amount of money earned from sales - Day to day sales from products or services that the company provides. If the company was to sell a factory though, that wouldn’t count as being revenue.
Cost of sales: The variable costs of production - These costs only occur when a sale is made
Gross profit = Total revenue - cost of sales
Expenses/ overheads: fixed costs of production - These are things that you have to pay regardless of how many sales the company makes. For example: Rent, advertising, managers salaries, salaries etc
Operating profit: Gross profit - expenses (operating profit is the income after subtracting all profits)
Other revenues and expenses: One off items like factories pr machinery etc, tax and finance costs
Profit for the year: Operating profit minus other revenues & expenses
Profit utilisation: reinvest or paid as dividends (this is completely up to the board of directors)
What is revenue
The amount of momey earned from sales (selling price x units sold)
What is costs fo sales
The variable costs of production (raw materials, packaging)
What is gross profit (and formula)
formula = Revenue - cost of sales
This measures the amount of profit made on buying and selling goods only
What are expenses
Also knows as overheads or fixed costs, these measure the profit made through the normal operations of a business and is the most common meausure of profit
What is operating profit (and formula)
Gross profti - expenses
This measures the profit made through the normal operations of a business and is the most common measure of profit
WHat is finance income
This is income earned froom investments (shares in other companies, money in the bank)
What is finance cost
The cost of debt (i.e. interest payments on loans)
What is profit before tax (and the formula)
Operating profit - finance
This is the measure that taxation is calculated from
What is taxation
Corporate tax is charged at 20%
What is profit for the year
FInal profit figure to be distributed by the board of directors
What is distributed profit
This is profit distributed to shareholders in the form of dividends or employees’ bonuses
What are retained profits
The money reinvested in the business for future use
What is the purpose of the income
To see if a business is profitable or not
To judge how efficient a business is in generating profits
To monitor sales
To monitor costs
Judge progress towards targets
To judge the extent to which an organisation is investing for long term profitability
Allows shareholders to compare investments
Judge performance over time
Different purposes for different stakeholders - employees, customers, shareholders
To acquire loans or investment
