Week 3- income statement Flashcards
What does the income statement do super simply?
The income statement shows net profit (or net loss)
What are the two main things profit is used for?
The two main things profit is used for is:
1) paying dividends
2) kept as retained earnings for future growth
What are the 4 ways an income statement is useful?
An income statement is useful because it shows:
1) business performance in the last period
2) Provides a basis for predicting future performance.
3) Helps users understand the return the entity has produced and how efficiently resources have been used.
4) Helps assess the risk or uncertainty of achieving future cash flow
What’s the equation for profit? (it’s easy)
profit (or loss) = revenue - expenses
What is accrual basis accounting?
Accrual basis accounting is when revenue and costs must be recognised as they are earned or incurred, not as money is received or paid.
What is Cash-Basis Accounting?
Cash basis accounting is when Revenues are recognised when cash is received and Expenses are recognised when cash is paid
Is cash basis accounting in accordance with International financial reporting standards?
cash basis accounting is not in accordance with International financial reporting standards
What is cost of sales?
Cost of sales is the direct costs incurred for the goods/services sold in the period
What are operating expenses?
Operating expenses are all other expenses incurred in trading activities other than cost of sales
What is depreciation?
Depreciation represents the loss in value of this asset over time.
What are the two methods of depreciation?
The two methods of depreciation are straight line and reducing balance.
What are the four factors that have to be consider when depreciating and asset?
The four factors that have to be considered when depreciating an asset are:
1) The cost (or fair market value) of an asset
2) The useful lifespan of an asset
3) residual value (disposal value)
4) depreciation methods
What is the straight line method of depreciation?
In the straight line method of depreciation the loss of value will be spread equally over the useful life of an asset. So, the depreciation amount is the same each year.
E.g asset worth £1,100
Residual Value £100
Useful lifespan 4 years
annual depreciation =£250
What is the reducing balance method of depreciation?
The reducing balance method of depreciation is where for each year, you work out the depreciation charge as a percentage of the accounting value brought forward.
E.g a car is bought for £50k and depreciated by reducing the balance of 20%
First year deprecates £10k. leaving 40k value.
next year depreciated £8k leaving 32k value and so on
What is bad debt?
Bad debt is when an entity goes bankrupt and you cant redeem your debt and have to write it off as an expense.
