UNIT 5 - Chap 24: Income statements Flashcards
Importance of profit for a private sector business? (3)
- A reward for risk
- A source of finance
- Indicator of success
Describe what a reward for risk is?
Where you can use this to pay dividends to shareholders as keeps shareholders satisfied
Describe what a source of finance is?
Is where profit can be used as retain profit so the business doesn’t need to use a bank loan meaning they won’t have to pay the bank back or pay interest
Describe what a indicator of success is?
Is where a high profitability will attract future investors to invest into the company, this cash can then be used for research and development
What is the definition of cash?
it’s the money used to pay for day-to-day expenses for example raw materials and bills
What is the definition of profit?
money made after all costs have been paid. It is used for dividends and retained profit
What is an income statement?
An income statement shows business owners and manages the business has made a profit or a loss
What are the 6 key features of an income statement? (6)
- Revenue
- Costs of Sales/goods sold
- Gross Profit
- Expenses
- Net Profit (Profit)
- Retained Profit
Describe what revenue is?
Revenue= Money Made from sales (Price x Quantity)
Describe what cost of sales is?
These are the costs to make the product and are made up of variable costs.
This can be calculated two ways:
Method 1: Adding all the variable costs e.g. raw materials, packaging, wages)
Method 2: (Opening inventory (stock) + Purchases– Closing inventory) X cost per unit
Describe what gross profit is?
revenue – Cost of Sales
Describe what expenses is?
These are all other expenses of the business (Fixed Costs) E.g. Rent, salaries, depreciation of assets
Describe what Net Profit (may be listed as just profit in the exam) is?
Gross profit – Expenses
Describe what retained profit is?
This is the amount of profit that is reinvested back into the business, after dividends and taxes are paid.
