Income Statements Flashcards
What are costs of sales?
This refers to the money it costs to make a product
Name 2 cost of sales items for a florist
Flowers and ribbons
Why does a business need to know how much is spent on cost of sales items?
So that the amount can be deducted from sales revenue to calculate gross profit.
How do you calculate gross profit?
Revenue - cost of sales
What’s the impact of a positive gross profit?
There is money to pay expenses, there may be money available for better equipment or expansion, enough goods are being sold to make a profit
What does a negative gross profit mean?
A negative gross profit means cost of sales are higher than revenue. There is no money left to pay expenses.
If a business has negative gross profit identify 2 actions that could be taken to improve the situation.
1) Increase sales revenue by selling more goods
2) Reduce cost of sales by finding a cheaper supplier
How is net profit calculated?
Gross profit - expenses
What is net profit?
The money made from selling a product after all costs have been deducted
What is gross profit?
The money made from selling a product after the cost of producing it (cost of sales) has been deducted.
Name 2 actions that could be taken for a business with a negative net profit
1) Reduce overheads
2) Reduce number of staff
What is the impact of negative net profit?
Gross profit is low or negative
Expenditure is too high
The business is losing money
What are the potential problems with finding a cheaper supplier?
It may reduce the quality of the goods
What are the potential problems with paying staff a lower wage? (obviously not less than minimum wage as that’s illegal)
Staff could leave and go to competitors, you would then have the cost of recruiting and training new staff
What are the potential problems with increasing the selling price?
It could mean less people buy the product
