Module 4, Chapter 11 - Revenue, Costs and Profit Flashcards
What is revenue?
Revenue is the money a business receives, measured over a specific period of time. Revenue can be received from
several sources.
What is the equation for revenue?
Revenue = Sale price × Number of products sold
True or false? If products (or goods) are sold at different prices then total revenue is the sum of the prices at which the goods are sold.
True!
What is meant by the ‘separate entity concept’/ the ‘business entity concept’?
This means that a business is a separate entity from the people who own it, therefore the business’s activities should be
considered separately from the owners’ activities. For instance, the personal spending/ earnings of a company owner would not be looked at when examining the activities of that business.
What are the alternative names for revenue?
- Turnover
- Sales, or occasionally net sales
- Income, or occasionally gross income
Where does revenue come from? List 4 sources.
- Sales of goods or services
- Interest income
- Royalties
- Other income
Where does most business revenue come from?
Most business revenue comes from the sale of goods and/or services.
What is meant by the ‘sale of goods’?
The sale of physical goods/ tangible items.
What is meant by the ‘sale of services’? Provide examples.
The sale of a service, as opposed to the sale of tangible items.
An example is internet service providers, whom you pay for internet access, rather than for a tangible item. The internet service company’s revenue will come from people paying them for internet access.
Some businesses sell goods and services, and the business’s revenue will come from both. Provide an example of a business that sells both.
A garage which sells car parts (goods) where you can also pay mechanics for car maintenance (services) will make income from both the sale of goods and services.
What is interest income/ interest receivable?
This is interest earned from, for example, money in a bank account.
What are royalties?
These include earnings from patents, copyrights or other copyrighted material, such as books and music.
List 3 examples of ‘other income’?
This can include income from:
- The sale of an asset (such as property or vehicles)
- The sale of a business
- One-off items that generate income.
Broadly speaking, what is meant by a business’s costs, expenses or expenditure?
Items or services that the business has to pay for.
Define ‘expenditure’.
Expenditure is money spent (on an item, or a service, etc.) by the business.
Define ‘expense’.
An expense is an amount paid for an item or service that is being, or has been, used in the business. It often refers to a
payment – or expenditure – that a business makes regularly over a specific time period, like office rent (rental expense),
utilities (i.e. payments for electricity, gas, water), wages or advertising.
Define ‘costs’.
A cost is an amount that has to be spent to buy or obtain something. A more thorough definition would be ‘a resource
sacrificed or foregone to achieve a specific outcome’ as cost is not always financial.
Costs are often broken down into further categories. Name the two categories.
- Fixed costs and variable costs
- Direct costs and indirect costs
What is a ‘fixed cost’?
Fixed costs are costs or expenditure amounts that are unchanged (i.e. fixed) regardless of how much work is done or
how much output is produced.
Provide 6 examples of fixed costs.
Examples of fixed costs are:
1. Rent
2. Business rates (i.e. local council tax on business properties)
3. Business insurance
4. Utilities (i.e. water bills, electricity and gas bills)
5. Legal and accountancy fees
6. Managers’ wages.
Define variable costs.
Variable costs are costs that vary with how much work is done or how much output is produced. As activity rises,
variable costs increase; and vice versa.
Provide examples of variable costs.
- The cost of raw materials used to make the business’s product – the more products that are made for sale, the
more raw materials need to be acquired. - Transport or distribution costs in cases where the more products are sold and delivered, the more workers/lorries/
fuel etc. is needed to transport goods to customers. - Staff or labour costs where this is dependent on time or quantity (e.g. if a product requires a business to pay a
worker £20 to make it, then the labour cost of two products is £40, and the labour cost of 15 products is £300).
Some costs have both a fixed part and a variable part (e.g. managers’ wages which have a performance-related bonus element). What is the name of these costs?
These are known as semi-fixed costs or, more usually, as semi-variable costs.
What is an ‘indirect cost’?
Indirect costs are costs or expenses that are necessary to operate the business, but which do not relate directly to the
production or sale of the business’s products or services. Another name for indirect costs is overheads.
Provide examples of indirect costs.
Examples are:
1. Utilities
2. Rent
3. Administrative costs
4. Marketing expenses
5. Interest paid on overdraft or loan
6. Insurance
7. Accountancy and legal fees
What is a ‘direct cost’?
Direct costs are costs or expenses that relate specifically to the production or sale of the business’s products or
services.
Provide examples of direct costs.
These can include:
1. Wages
2. Raw materials
3. The purchase of inventory (also known as stock), which is defined as items the business intends to sell in the course of its trade
4. Transport costs – either carriage inwards (or carriage in), which is the cost, paid for by the business rather than the supplier, of delivering purchases to the business; or carriage outwards (also known as carriage out), which is the cost of delivering goods to customers that is paid for by the business and not the customer.
Where in a business’s accounting records are costs and expenses recorded?
In a business’s statement of profit or loss (also known as the income statement, or formerly profit and loss account)
What does the statement of profit or loss show?
This shows a business’s total revenue (or income) and deducts total expenses for the period, resulting in a profit
or loss – it is one of the primary financial statements used to show how a business performed over a given period of time.
In the statement profit or loss, what do the numbers in brackets indicate?
The numbers in brackets indicate subtracted amounts.
What is a business’s cost of sales?
These are expenses relating directly to the make or manufacture of the products sold by the business in the course of its trade. It is a term often used by merchanting businesses (i.e. those that sell goods) rather than service industry businesses (which provide services).
What do cost of sales usually include?
- Raw materials, which are the basic materials that make a product the business intends to sell as part of its trade.
- Inventory (also known as stock or finished goods), which are goods the business holds with the intention of selling in its trade, but have not yet been sold.
- Work in progress, WIP for short; these are goods that are in the process of being made or manufactured but have not yet been finished.
- Staff wages and other labour costs that relate to the make or manufacture of these goods can also be included in the
cost of sales figure.
Define depreciation expense and provide an example.
Depreciation is an allocation of the cost of an asset over its useful life. It is recorded as an expense even though no actual money has been spent or received.
Since tangible assets wear out and need to be replaced, a business will account for this by estimating how much value of the asset used in the business, (such as vehicles or machinary) has reduced by over a given period of time.
Provide examples of selling and distribution costs.
Selling and distribution costs include all expenses involved in marketing, selling and distributing a business’s goods or
services. This can include the wages of staff working in those departments, vehicle and transportation costs (which could
include depreciation), advertising and promotion costs, etc.
