2. Measuring and reporting financial performance (INCOME STATEMENT)

Question 1

Equation for profit?

Answer 1

Total revenue for the period - Total expenses incurred in generating that revenue

Question 2

What is the layout of the income statement?

Answer 2

Question 3

What is another name for “operating profit”?

Answer 3

Operating profit is a company’s earnings after deducting operating expenses and Cost of Goods Sold (COGS). It’s also known as EBIT (earnings before interest and taxes)

Question 4

What can you do with “profit for the period”?

Answer 4

Accumulated retained earnings
–> Belongs to the owners, but not paid out of the business

Dividends
–> Pay out profit to all shareholders

Question 5

What are the two ways in which we can carry out depreciation?

Answer 5

1. Straight-line method
2. Reducing-balance method

Question 6

How does the Straight-line method work?

Answer 6

Divide the depreciation evenly across the assets useful lifespan

Question 7

What is a “residual (scrap) value”?

Answer 7

value you can sell the asset for after its useful life

Question 8

How does the Reducing-balance method work?

Answer 8

Depreciation always follows the same %. So depreciation is greater in the first year(s) of use.