Lecture 4 Flashcards
How is profit / loss calculated?
revenues - expenses
What is the definition of revenue?
Income generated specifically from core business activities
When is income recognised?
When it is earned, not when payment is received
Why is income recognised when it’s earned (as opposed to on receipt of payment)?
Because cash flows may not match business activities or provide fair view of business performance
What is the definition of expenses?
Outflow of economic benefits (not necessarily immediate cash outflow)
What are the types of expenses?
- Cost of goods sold
- Operating expenses
- Non-operating expenses
What are examples of operating expenses?
- Rent
- Insurance
- Depreciation
- Bad debts expense
What are examples of non-operating expenses?
- Loss on disposal
- Interest on loans
When are expenses recognised?
- Related revenues are recognised (CoGS)
- Expenses are incurred
What are some examples of payments that are NOT expenses?
- Purchasing assets
- Paying off liabilities
What are the four profit numbers?
- Gross profit
- Operating profit
- Profit before tax
- Net profit
How is gross profit calculated?
revenue - CoGS
How is operating profit calculated?
gross profit - operating expenses
How is profit before tax calculated?
operating profit
+ non-operating income
- non-operating expenses
How is net profit calculated?
profit before tax - tax
