05 - The Income Statement

Question 1

What is the purpose of the Income Statement?

+ two keywords

Answer 1

to measure and report how much profit or loss the business generated over an accounting period

revenue vs. expenses

Question 2

Profit = …

Answer 2

total revenue for period - total expenses incurred in generating the revenue

Question 3

Definition | Revenue

1.
2.
3.

Answer 3

• increase in the shareholder´s equity (i.e. increase in net assets)
• measure of inflow of economic benefits from ordinary activities
• e.g. providing a service to a customer for which payment is made

Question 4

Definition | Expenses

1.
2.
3.

Answer 4

• decrease in the shareholder´s equity (i.e. decrease in net assets)
• outflow of economic benefits arising from ordinary activities
• e.g. cost of providing a service to a customer

Question 5

Differences between Income Statement and Statement of financial position

Answer 5

IS: is for an accounting period, usually one year | links the SOFP between two periods

SOFP: a snapshot at a point in time, e.g. June 3rd 2017

Question 6

What does the connection of the IS and the SOFP look like?

Answer 6

Opening Position | SOFP at 6th June 2017 -> IS for the year 2017 to 2018 -> Closing Position | SOFP at 6th june 2018

Question 7

Definitions:

1. Revenue expenditure
2. capital expenditure
3. revenue income
4. capital income

Answer 7

1. purchase of raw material, salaries, rent etc.
2. purchase of non-current assets, e.g. buildings, shop fittings etc.
3. proceeds from sale goods, interest and dividends received
4. proceeds from sale of non-current assets, e.g. buildings, machinery etc.

Question 8

What are the three types of profits?

1.
2.
3.

Answer 8

1. gross profit
2. operating profit
3. profit before tax

Question 9

Definition | Gross Profit

Answer 9

• represents the profit from buying and selling goods before any other expenses

Question 10

Definition | Operating Profit

Answer 10

• this is profit after deducting all operating expenses incurred in running the business (e.g. salaries, rent. electricity)

Question 11

Definition | Profit before tax

Answer 11

• operating profit is then adjusted for non operating income (+)/ expenses such as finance cost (-)