Lesson 12 - Income Statement Flashcards
What is revenue?
An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for a capital contribution)
What is an expense?
An expense is a decrease in assets (or increase in liabilities) that reduces owner’s equity (except for Drawings).
What is the purpose of an income statement?
To calculate whether the business has made (or is predicted to make) a profit or a loss.
What are the most common types of revenue?
Fees, sales and interest on investments
What are the most common types of expenses?
Advertising, electricity, wages, rent, insurance, interest on loan
T/f - Inventory is an expense.
False - Inventory is not classified as an expense because it represents goods or products that a business has purchased but has not yet sold.
Expenses are costs incurred in the process of generating revenue, and they are typically recognised on the income statement when they are consumed or used up in the normal course of business operations.
T/f - Capital contribution is a revenue.
False - A capital contribution is not classified as revenue because it represents funds or assets that an owner or investor injects into a business. Revenue, on the other hand, is income earned by the business through its primary operations, such as selling goods or providing services to customers.
T/f - GST Settlement is an expense.
False - A GST (Goods and Services Tax) settlement is not classified as an expense because it involves the collection and remittance of taxes on behalf of the government, rather than representing a cost incurred in the normal course of business operations.
T/f - Wages are an expense.
True - Wages are classified as an expense because they represent the compensation paid by a business to its employees for their labor and services. These payments are considered a cost of doing business because they are necessary to support the company’s operations and generate revenue.
If an income statement indicates that the business has made a loss, what are the two things they should do next month?
(to increase the liklihood that they will make a profit)
Increase revenues.
Reduce expenses.
Give two possible ways a business could increase its revenue.
- Increase sales through the use of effective advertising.
- Increase inventory mix/offer a wider variety of products.
- Offer complimentary products (e.g. selling helmets, locks and lights as well as bikes)
Give two possible ways a business could reduce its expenses.
- Reduce the amount of staff during quieter times of the week (reducing wage expense)
- Source cheaper supplies/switch suppliers
- Buy supplies in bulk to get a better price per unit.
- Renegotiate loans to repay over a longer period to reduce repayments.
An income statement falls under which section of the accounting process?
Reports
The formula for net profit is…
Revenue - Expenses
T/f - Drawings will reduce the level of profitability.
True - Drawings lead to a reduction in profit because they represent withdrawals of funds or assets by the owner(s) from the business for personal use.
When an owner takes money or assets out of the business, it doesn’t contribute to the company’s revenue or cover its expenses, which are the typical components that determine profit.
What is the formula for Net Profit Margin?
What is the NPM for this business?
23.49%
