Topic 7- Income Statement Flashcards
What is the purpose of deriving an income statement?
The purpose of deriving an income statement is to determine the net profit or net loss resulting from the business’ operations (use of resources) over a particular period of time - usually a 12 month period. The statement will therefore indicate the success of the production activities which have taken place during that period of time.
What are the 2 general components of an income statement?
The 2 general components of an income statement are operating income and operating expenses.
How do we calculate the net profit/loss?
The net profit/loss is the difference between the operating income and the operating expenses. A profit is earned when the income exceeds the expenses, and a loss is incurred when the expenses exceed the income.
Define ‘income’ and ‘expenses’.
The term income refers to amounts earned by the business through the sale of goods and services during the period of time under consideration. Strictly speaking this refers to operating income and should not be confused with capital income. Capital income refers to amounts received from the sale of non-current assets, or the obtaining of loan funds, and should not be regarded as income for inclusion in the revenue statement.
The term income can be interchanged with the term revenue. It is important to remember that income is considered to have been earned during an accounting period irrespective of whether the money has actually been received. The critical point is that income is earned at the point in time when the transactions, which will result in money or an equivalent being received, takes place.
Explain which types of income and expenditure are included in an income statement and provide 3 examples of each.
The income statement included operating income and operating expenses. Examples of operating income include product sales revenue, interest, and profit on the sale of an asset. Examples of operating expenses include electricity, labour costs, and depreciation.
Items such as ‘rations’, ‘seeds used’ and ‘fed out’ are treated as income items within trading accounts. Why are these items treated as expense items in the income statement?
In the trading accounts these item were treated as income items because the associated enterprises in effect sold products to other enterprises (fed out), to themselves (seeds used) and to the business’ permanent labour or owners (rations). In the income it is necessary to recognise that the other enterprises, the enterprise itself and the permanent labour/owners purchased these items, thus they are treated as expenses in the income statement.
In determining the cash operating costs to be included in a income statement, why do we exclude the cash seed purchases which have been included in the crop trading accounts?
we exclude the cash seed purchases which have been included in the crop trading accounts because they have already been treated as costs and are incorporated in the trading profit figure included in the income section of the profit and loss statement. If we do not exclude them from the cash operating cost, they will be accounted for twice.
If a particular item of cash receipts is mistakenly treated as capital income instead of operating income, what will be the effect on the net profit?
the net profit will be understated because an item of income will not have been included in the calculation of the profit.
If a particular item of cash payments is mistakenly treated as an operating expense instead of being treated as a personal expense, what will be the effect on the net profit?
the net profit will be understated because an expense which should not be included has been included thus overstating expenses.
