Profit and loss account

Question 1

Definition of the profit and loss account (income statement)

Answer 1

Financial statement of a firm’s trading activities over a period of time

Question 2

Definition of sales revenue

Answer 2

is the money an organisation earns from selling goods and services.

Question 3

Definition Cost of goods sold

Answer 3

are the direct costs of production, such as the cost of raw materials, component parts, and direct labour

Question 4

formula for cost of goods sold (COGS)

Answer 4

COGS= opening stock + purchases - closing stock

Question 5

Definition of gross profit

Answer 5

refers to the profit from a firm’s everyday trading activities

Question 6

formula for gross profit

Answer 6

Gross profit= sales revenue - cost of goods sold

Question 7

Definition of net profit

Answer 7

financial surplus from sales revenue after all costs and expenses are accounted for

Question 8

Formula for net profit

Answer 8

Net profit= Gross profit - expenses

Question 9

Expenses

Answer 9

are a firm’s indirect costs of production

Question 10

Retained profit definition

Answer 10

shows how much of the net profit after interest and tax is kept by the business for its own use as an internal source of finance.

Question 11

Retained profit equation

Answer 11

Retained Profit = Profit after interest and tax – Dividends.

Question 12

Limitations of profit and loss account (3)

Answer 12

• P&L account shows the historical financial performance of a business. So there is no guarantee that future performance will be successful
  -As there is no international standardised format for the P&L account, it might be difficult to compare the account in different countries
  -Window dressing can occur, where this is the legal act of creative accounting by manipulating final accounts to make them appear more attractive.