Topic 2 - Financial statements Flashcards
How is the income statement split?
The Trading account and the Profit & Loss account.
What does the Trading account do?
Calculates gross profit by finding the excess of net sales revenue over cost of sales.
What does the Profit & Loss account do?
Calculates profit for the year by deducting all expenses and adding all other income to the gross profit.
What does the Statement of Financial Position do and what does it consist of?
Calculates wealth (Assets = Liabilities + Capital). Consists of what a business owns and owes at a specific date.
What are net sales?
The sales that actually incurred during the period after deducting any returns.
How do we calculate the net sales revenue?
Net Sales Revenue = Sales Revenue - Sales Returns
How do we calculate the net ordinary goods purchased?
Net Ordinary Goods Purchased = Ordinary Goods Purchased - Purchase Returns
What is carriage inwards?
The cost of transporting the goods to our premises.
How do we calculate the cost of goods purchased?
Cost of Goods Purchased = Net Ordinary Goods Purchased + Carriage Inwards
What is the opening inventory?
Goods unsold at the end of the previous accounting period.
What is the closing inventory?
Goods unsold at the end of the current accounting period.
How do we calculate the cost of sales?
Cost of Sales = Opening Inventory + Cost of Goods Purchased - Closing Inventory
What are the benefits of the Income Statement? What does it help businesses do?
- Evaluation of performance (in comparison with competitors, previous years and budget)
- Planning ahead
- Obtaining loans from banks
- Telling prospective business partners how successful the business is
- Telling prospective business buyers how successful the business is
- Calculating the tax due on the profits
