Income statements Flashcards
What are the 3 parts to an income statement?
Trading account
Profit and loss account
Appropriation account
What is the Trading Account for?
Records the firm’s gross profit or loss.
What does Cost of sales record?
How much it cost to make the products sold during the year.
What is Gross profit?
The difference between the revenue from selling the product and the direct costs of making it.
Gross profit = revenue - direct costs.
What does the The profit and loss account do?
Record all the indrect costs of running the business.
What does Profit loss account cover?
Doesn’t cover costs of buying machinery but it does cover depreciation.
What is depreciation?
The amount of value which an asset has lost over a preiod of time due to wear and tear.
What does Calculating depreciation allow?
Business to set aside money for replacing assets.
What is the operating profit?
The money left after paying all the indirect costs.
What is The Appropriation account?
Last part of the statement which is only included for limited company accounts.
Records where the profit has gone.
In the income statement, if gross profits are low…
managers need to look at ways of reducing the cost of making the product, or increasing the revenue, to make gross profit higher.
In an income statement, if the operating profits are significantly lower than gross profit…
it could show that the company’s operating expenses are a weak area.
If the operating profit is too low…
then Banks and investors may be worried about losing their money to make an investment.
What does the retained profit tell you?
If the company is profitable or not - shareholders and potential investors will look at this figure to assess investments.
