The Income Statement components and calculations Flashcards
What is revenue?
This is the money that the business makes from sales.
How do you calculate revenue?
Revenue = Price x Quantity Sold (sales)
What are cost of sales?
This is the cost to make the product, no other expenses. In most cases it will consist of the stock to make the product, for instance if you were making clothing the cost of sales would be the material.
However, if you employed people to only make the clothes, for example on piece work, you may include their wages. So it is the cost of making the product.
- Basically, direct costs of making and producing the product.
- ONLY the direct (variable) costs.
What is Gross Profit?
Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services.
-It really indicates how much it costs to make the product.
How do you calculate gross profit?
Gross Profit = Revenue - Cost of sales (COS)
It only considers the direct costs of production, it doesn’t include indirect costs.
-This may be rearranged so that Revenue =Gross profit + Cost of sales or Cost of sales = Revenue - gross profit.
What is Operating Profit?
Operating profit is the total income a company generates from sales after paying off all operating expenses, like rent, employee payroll, equipment and inventory costs. But before deductions of interest and taxes.
-It is more a more realistic measure of profit as it accounts for both direct costs (variable costs) and expenses (overheads/fixed costs).
How do you calculate cost of sales?
Cost of sales = Opening inventory (from previous year) + purchases in this year - closing inventory (what stock is left)
How do you calculate Operating Profit?
Operating profit = Gross profit - all expenses (apart from financial costs)
Deduct all other expenses (like salaries, marketing, overheads, etc) from gross profit apart from financial expenses like tax, depreciation and interest.
What is Net Profit?
Net profit is a company’s total earnings after subtracting all other expenses (cost of sales already subtracted).
It is the most important feature of the income statement as its the bit that the business keeps.
What is the difference between operating profit and net profit?
The difference between operating profit and net profit is that we deduct financial costs as well to get net profit not just other non-financial costs for operating profit.
How do you calculate net profit using operating profit?
Net profit = Operating profit - financial costs (like depreciation, interest, tax)
How do you calculate net profit using gross profit?
Net profit = gross profit - all other costs (expenses)
If the business makes a loss (negative number), how is this presented?
The value will be shown in brackets.
