Income statements chap33

Question 1

What do income statements do?

Answer 1

• reports level of profit/loss
• measures performance
• used to inform stakeholders

Question 2

How do you work out gross profit?

Answer 2

sales revenue - cost of sales

only considers direct costs of production

Question 3

How do you work out cost of sales?

Answer 3

opening inventory + purchase in this year - closing inventory

Question 4

How do you work out profit for the year?

Answer 4

retained profit - tax and dividends

Question 5

How do you work out operating profit?

Answer 5

gross profit - expense

considers direct and fixed costs

Question 6

How do you work out profit before tax?

Answer 6

operating profit - finance costs

Question 7

Stakeholder interests…

Answer 7

• shareholders: want to know the final profit figure
• investors: want to know how profitable the business is
• employees/managers: may want to know the expense of the business
• suppliers: evidence of ability to pay

Question 8

The usefulness of income statements…

Answer 8

• enables a business to make decisions
• management can use the income statement to monitor the progress of the business
• the figures can be used to calculate particular ratios which can help asses the businesses performance
• can help a business formulate its future objectives

Question 9

What is the difference between gross profit and operating profit? (2 marks)

Answer 9

Gross profit only considers the direst costs of production whereas operating profit is more realistic and measures the profit as an account for both direct costs and expenses.