income statement Flashcards
(5 cards)
Explain the main components of a trading, profit and loss account (the income statement) and the way that it is constructed
trading account- gross profit- sales revenue and cost of producing goods sold
e.g. business sells products worth 100K and cost of producing them 40K gross profit = 60K
profit and loss account- operating and net profit: indirect costs such as rent, salaries, utlities, marketing
and interest and tax payments
could have appropriations account- how firm used net profit - either dividnens/ reinvestment
what is the income statment
used by firms to record their transactions in order to calculate profits, monitor perfimenance, take neccisary actions, compare with competitors, satisfy stakeholders
- cost v profit
net profit, gross profit calculations
gross profit = sales revenue- cost of sales
sales revenue = sales price X qty/ output
cost of sales= opening inventories/ stock + purchases - closing inventories/ stock
operating profit = gross profit- operating expenses (rent, utilities, marketing, wages )
net profit= operating profit - expenses ( tax + interest)
expenses ( over heads)= GP-NP
Evaluate ways in which a business could improve its profit
- increase price
- decrease cost of sales
- decrease operating costs
- increase sales volume - depends on PED
- ansoff matrix- product development, market, diversification etc
- m=increasing marketing
- improve csutomer retention
- increase productivity of staff- automation/ training
- minimise waste priorities efficiency
why is profit important
- to reinvest
- to attract investors
- reward for entrprenurship
- source of finance to help the firm grow
- measure of success
