Income Statement

Question 1

What’s the first thing you should do?

Answer 1

[Company Name]
Income Statement for the year ended [date]

Question 2

What’s the next part after?

[Company Name]
Income Statement for the year ended [date]

Answer 2

Revenue (Sales)
– Cost of Sales
= Gross Profit

Question 3

How do you calculate COGS?

Answer 3

Opening Inventory
+ Purchases
– Closing Inventory
= Cost of Sales

Question 4

What’s after?
[Company Name]
Income Statement for the year ended [date]

Revenue (Sales)
– Cost of Sales
= Gross Profit

Answer 4

– Operating Expenses

Question 5

What is – Operating Expenses made up of?

Answer 5

– Operating Expenses:
- Depreciation
- Wages & salaries
- Rent
- Insurance (adjusted)
- Bad debts + provisions
- Other expenses

Question 6

After working out,
Revenue(sales) & operating expenses
What can you find?

Answer 6

Revenue - Operating Expenses = Operating profit

Question 7

What’s after?

[Company Name]
Income Statement for the year ended [date]

Revenue (Sales)
– Cost of Sales
= Gross Profit
– Operating Expenses:

= Operating Profit

Answer 7

+ Other income (e.g., gain on asset sale, interest received)
– Finance costs (e.g., debenture interest

Question 8

Components of “other income”?

Answer 8

Profit on sale of non-current asset
Sale price – NBV

Interest received
e.g., from bank deposits or investments

Rental income
If business rents out part of its premises

Dividends received
From investments in shares

Government grants (if revenue-based)
E.g., subsidy for employment

Question 9

Components of finance costs?

Answer 9

Debenture interest
Fixed interest on long-term debt

Bank loan interest
Interest charged on bank borrowings

Bank overdraft interest
Charged when account is overdrawn

Lease interest (finance leases)
Interest portion of lease payments

Question 10

Operating profit + other income - finance costs

Answer 10

Profit before tax

Question 11

Revenue (Sales)
– Cost of Sales
= Gross Profit
– Operating Expenses:

= Operating Profit
+other income
-finance costs

Profit before tax
-corporate tax

Answer 11

=profit after tax

Question 12

Profit - preference dividends

Answer 12

= Profit Available to Ordinary Shareholders

Question 13

Important notes

Answer 13

• Depreciation must match policy given (e.g., straight-line or reducing balance). Time apportion if assets are bought/sold during the year.

Show provision for doubtful debts: New provision – old provision = expense (or gain)

• Accruals and prepayments need to be calculated precisely. For example:
• If insurance paid is £12,000 for 18 months, and the year end is 12 months in, then £4,000 is a prepayment.