Income Statements Flashcards
What is an income statement?
an annual legally required financial document that summarises a business’s historic activity (sales revenue) and expenses to show whether it has made a profit or loss over a time period
Why are there different measures for profit?
To identify issues in stages
How do you build a income statement?
Revenue Costs of sales - Gross profit Fixed overheads - Operating profits Net financing costs - Profit before tax Taxation - Profit for the year
Give an example of an income statement
revenue = 100'000 costs of sales = (40'000) - Gross profit = 60'000 fixed overheads = (25'000) - Operating profit = 35'000 net financing cost = (5000) - Profit before tax = 30'000 taxation = (5700) - Profit for the year = 24'300
What is revenue?
money in from sales
What is cost of sales?
direct variable costs from production
What is gross profit?
gross profit = revenue - cost of sales
What are fixed overheads?
other expenses that are fixed costs
What are operating profit?
operating profit = gross profit - fixed overheads
What are net financing costs?
interest = can be additional or negative
eg bank loan interest (NEGATIVE)
eg bank investment (positive)
What is profit before tax?
profit before tax = operating profit - net financing costs
What is taxation?
the standard rate of profit before tax = 19%
What is profit for the year/net profit ?
Net profit = profit for the year - taxation
What is the best indicator for internal performance?
operating profit as it is inclusive of only internal issues
What can owners do with net profit?
- re-invest it
- put it into research and development
- dividends for shareholders
- keep it for savings and security
What stakeholders are interested in an income statement?
employees shareholders suppliers management government future potential investors
Which profit are employees most interested in?
net profit = job security and wage negotiations
Which profit are shareholders most interested in?
net profit = for dividends, shares and success and trends
Which profit are suppliers most interested in?
net profit = charge more, cost of sales, how much they are costing
Which profit is the management most interested in?
profit before tax = see internal performance
Which profit is the government most interested in?
taxation and net profit = see success and potential performance
Which profit are future potential investors most interested in?
net profit = performance, potential dividends
What is profit utilisation?
is the way in which profit is used ie :
distributed to shareholders
re invested
retained profit
What is profit quality?
a measure of whether profit is sustainable in the long-run.
What is high quality profit?
this is profit that continues in the future
What is low quality profit?
this is profit that arises from exceptional or extraordinary circumstances that are unlikely to continue
What is window dressing?
representing accounts in a favourable light
What are methods window dressing?
Revaluation of land and buildings Depreciation of fixed asset Sale and leaseback Bringing forward sales and delayering expenditure Boosting intangible assets
What is revaluation of land and buildings?
Land and buildings can increase in value over time.
Businesses may obtain a recent valuation in order to show this increase
What is depreciation of fixed assets?
a firm may over-estimate residual value of assets or lifetime in order to keep expenses lower.
What is sale and leaseback?
Selling assets and then renting them back.
They have cash the sales but have to pay rent
What is bringing forward sales or delayering employees?
When a business encourages customers to place an order at the end of the financial year rather then the next. May offer a discount or special offers to persuade them. This makes sure that any income is boosting the end result in the year.
What is boosting intangible assets?
The value of goodwill and brand names can be increased. Examples such as logos, slogans, assets that arent physical can be valued and boosted.
