Statement of Comprehensive Income

Question 1

What is a statement of comprehensive income?

Answer 1

If produced correctly, will give an accurate calculation showing how much profit or loss the business has made. It records sales costs and profits over a period of time.

Question 2

Sales revenue

Answer 2

is the money coming into the business from providing a trade.
sales revenue = quantity sold x selling price

Question 3

costs of goods sold

Answer 3

the costs directly linked to providing that trade e.g., cost of buying in the goods or the raw materials.
Cost of goods sold = opening inventories + purchases - closing inventories.

Question 4

Gross profit

Answer 4

amount of money left or the surplus after the cost of goods sold has been deducted from the sales turnover. It is not the business’s final profit as there still are other expenses to deduct in the next part of the account.
gross profit = sales revenue - costs of goods sold.

Question 5

Profit

Answer 5

is the money after all expenses have been deducted from the gross profit and any other revenue income has been added.

Question 6

calculation for profit for the year

Answer 6

profit or loss for the year = gross profit - expenses + other income

Question 7

tax deduction

Answer 7

Tax is to be deducted from the profit, a percentage is paid to HMRC, this then gives profit after tax.
Some of profit is likely to be ploughed back into the business - retained profit.
Retained profit may be transferred from statement of comprehensive income to statement of financial position.

Question 8

What is depreciation?

Answer 8

Depreciation is an accountancy concept used to spread the cost of an asset over its useful life. The annual amount by which the assets are depreciated is therefore included as an expense in the statement of comprehensive income.
The statement of financial position should therefore show the historic cost of an asset, the amount by which it has depreciated over its life and then a current value for the asset.

Question 9

Straight line depreciation

Answer 9

A asset is depreciated by a set amount each year

Question 10

Reducing balance depreciation

Answer 10

an asset is depreciated by a set percentage of its remaining value each year

Question 11

How to work out straight line depreciation

Answer 11

involves reducing the value of an asset from the price paid, i.e. its historic cost, by a fixed amount each year. account must make two decisions:
- how long the asset is expected to be useful to the business, i.e. its expected life.
- how much the asset might be worth at the end of its useful life if it was sold i.e. its residual value.

Question 12

formula for straight line depreciation

Answer 12

(historic value - residual value) /expected life

Question 13

how to work out reducing balance depreciation

Answer 13

reducing the value of an asset by a set percentage each year. The percentage is decided by a senior accountant and stated in the financial reports.
This method depreciates an asset by a lower amount as the assets ages.
Net Book value = original cost - depreciated amount

Question 14

Adjustments to statement of comprehensive income

Answer 14

Adjustments will be made to a statement of comprehensive income so that the expenditure shown matches the period in which the good or service is used.
Two types of adjustments are made to account for timing differences.

Question 15

Adjustment - Prepayments

Answer 15

a expense is made in advance of the periods to which it relates.
the expense is taken out of expenses in the statement of comprehensive income and is shown as a current asset in the statement of financial position.
For example rental on a phone line paid quarterly in advance.

Question 16

Adjustments - Accruals

Answer 16

is when an expense is paid after the periods to which it relates. The expense is added as an expense in the statement of comprehensive income and shown as a current liability in the statement of financial position.
For example, electricity paid quarterly in arrears.

Question 17

Ways in which the statement of comprehensive income can be analysed

Answer 17

• comparisons between figures within the statement of comprehensive income profit as a percentage of sales revenue
• comparisons between years, i.e. gross profit this year as compared with gross profit for last year.
• intrafirm comparisons to see how different aspects of the business are performing e.g. comparing branches
• interfirm comparisons to see how the business is performing in relation to its competitors

Question 18

Profit quality

Answer 18

Profit quality is how sustainable the profit is. If profits increased, but because of a one off event such as selling an asset, then this cannot be repeated the next year and so profit quality may be seen as poor.
If increase in profit is a result of increased sales or lower costs then this may be seen as a achievable in future years and therefore profit quality is seen as good.