The Income Statement

Question 1

What is the income statement also called?

Answer 1

The profit and loss account.

Question 2

What is a public limited company?

Answer 2

A company which has sold shares to investors (the public) as a way of raising the capital to fund its growth.

Question 3

What does the term limited liability mean?

Answer 3

That shareholders can only lose the investment that they made in the company, no risk of sharing losses. They receive a share of the profit.

Question 4

What does the income statement show?

Answer 4

The profit or loss earned by a business in a particular accounting period.

Question 5

What are the four profits on the income statement?

Answer 5

• Gross profit
• Operating profit
• Profit before tax
• Profit for the period

Question 6

What is the revenue?

Answer 6

The amount that is to be received from customers in return for goods or services in the current year.

Question 7

What should happen to the sales in which no cash has yet been received?

Answer 7

They should still be recorded.

Question 8

What is revenue recognition?

Answer 8

The point in time in which a particular item of revenue can be shown in an income statement.

Question 9

What is the cost of sales?

Answer 9

The cost of the goods/services to generate the revenue.

Question 10

How would you calculate the cost of sales for a retail business?

Answer 10

Opening stock+Purchases-Closing stock

Question 11

Would the cost of sales include advertising and head office secretarial costs?

Answer 11

No

Question 12

What is the first measure of a companies profit?

Answer 12

The Gross profit/Gross margin.

Question 13

How do you calculate the gross profit?

Answer 13

Revenue - Cost of sales

Question 14

What are the expenses on the IS?

Answer 14

All the costs not included in the cost of sales. E.g. advertising, rent, insurance, depreciation.

Question 15

What is the accruals concept?

Answer 15

Revenues and expenses recorded on the IS in the period they are earned/ incurred, regardless of cash payments.

Question 16

What is an accrual?

Question 17

What is depreciation?

Answer 17

A non-cash expenses, which is the cost of using an asset over a period of time.

Question 18

What is the operating profit?

Answer 18

The profit before the interest and taxation.

Question 19

How is the operating profit calculated?

Answer 19

Gross profit - Total operating expenses

Question 20

What is another name for the operating profit?

Answer 20

PbIT= Profit before interest and tax

Question 21

What is a very important profit measure and why?

Answer 21

The operating profit. Management have little control over the interest and tax and so it allows a profit managers can exercise day-to-day.

Question 22

What does NET mean?

Answer 22

Something that has been taken away.

Question 23

What is the net finance costs?

Answer 23

The interest payable on bank loans and other borrowings and the interest receivable on any bank deposits and other investments.

Question 24

How do you calculate the net finance costs?

Answer 24

Interest payable - Interest receivable

Question 25

What is the taxation part of the IS?

Answer 25

Companies pay income tax (Corporation tax) on their profits.

Question 26

What is the profit for the period?

Answer 26

Profit a business earns after deducting all expenses, interest and taxes.

Question 27

How do you calculate the profit for the period?

Answer 27

Gross profit - Operating expenses - Interest - Tax

Question 28

What is a dividend?

Answer 28

A sum of money which is regularly paid to its shareholders out of its profit.

Question 29

How are costs on an income statement classified?

Answer 29

By function.

Question 30

Are all profits attributable to shareholders paid out in dividends?

Answer 30

No some profits are retained in reserves to finance the company’s plan for growth.

Question 31

What values on the income statement are deducted?

Answer 31

• Cost of sales
• Total operating expenses
• Net finance costs
• Taxation

Question 32

What are