Unit 21

Question 1

Q1. What is gross product?

Answer 1

A1. The difference between revenue and the cost of sales.

Question 2

Q2. What is profit?

Answer 2

A2. The difference between revenue and total costs.

Question 3

Q3. What is total cost?

Answer 3

A3. The cost of sales plus expenses.

Question 4

Q4. What is revenue?

Answer 4

A4. The amount earned from the sale of a product.

Question 5

Q5. What is the cost of sales?

Answer 5

A5. The cost of purchasing goods used to make products sold.

Question 6

Q6. What are expenses?

Answer 6

A6. Day-to-day operating expenses.

Question 7

Q7. What is an income statement?

Answer 7

A7. A financial statement that records revenue, costs, and profit of a business for a given period.

Question 8

Q.8 What is the importance of making income statements?

Answer 8

A.8 It must be produced once a year for a business and may even be produced more frequently for use of managers. It is not only used to view profit, but it also has a lot of importance from stakeholders.

Question 9

Q.9 Why are income statements important to owners / shareholders?

Answer 9

A.9 They can see how much they have earned from investments in the business.

Question 10

Q.10 Why are income statements important to shareholders?

Answer 10

A.10
(1) Higher profit means higher dividend for them.
(2) Market value of shares will fall and rise depending on profit.

Question 11

Q.11 Why are income statements important to employees?

Answer 11

A.11
(1) High profit increases job security.
(2) Expect pay raise.
(3) Profit sharing schemes means high profit if business makes more profit.

Question 12

Q.12 Why are income statements important to lenders?

Answer 12

A.12
(1) Make sure business can repay loans.
(2) If business can repay loans when they are due.

Question 13

Q.13 Why are income statements important to the government?

Answer 13

A.13 More profit means more tax paid to government.

Question 14

Q.14 Why are income statements important to suppliers?

Answer 14

A.14 Business will continue to purchase more materials if more profit is earned by business.

Question 15

Q.15 Why are income statements important to managers?

Answer 15

A.15
(1) Compare profit from one year to the next compared to other business to measure performance of business.
(2) Retained profit is an important source of finance for business.

Question 16

Q.16 Why is it important to understand the difference between profit and cash in a business?

Answer 16

A.16 While cash and profit are both important in a business, both of them are not the same thing. A business needs both to function and if the owners do not understand the difference, the business is likely to fail.

Question 17

Q.17 What is the difference between profit and cash?

Answer 17

A.17
(1) Investments increase cash, but does not increase profit.
(2) Capital expenditure decreases cash but does not decrease profit.
(3) Sales of goods increase profit as soon as the sale has been made, but does not increase cash until it has been paid.

Question 18

Q.18 What is the importance of measuring profit in a private sector business?

Answer 18

A.18
(1) Measure success of a business.
(2) Measure performance of managers.
(3) Decide whether or not to continue making or selling a product.
(4) Finance the purchases of non-current assets, expansion, etc.
(5) Attract investors that provide additional funds.

Question 19

Q.19 What are the types of profit?

Answer 19

A.19
1) Gross profit.
2) Retained profit.
3) Profit.