Lect 4 (I/S)

• What is the purpose of the income statement?

  Reports profit or loss over a period
• How is profit calculated?

  Profit = Revenues - Expenses
• What is revenue in the context of an income statement?

  Inflow of economic benefits
• What are cash sales?

  Sales where cash is received immediately
• What are credit sales?

  Sales where cash will be received later
• When is revenue recognized?

  When goods/services are delivered, not cash received
• What are expenses?

  Outflow of economic benefits in generating revenues
• What is cost of goods sold (COGS)?

  Direct cost matched to revenue
• When are expenses recognized?

  When related revenues are recognized
• What is gross profit?

  Sales revenue - COGS
• What does operating profit represent?

  Wealth generated from main business activities
• What is net profit?

  Profit after all expenses and taxes
• How do cash flows relate to business activities?

  Cash flows may not match business activities
• What is the formula for calculating total equity?

  Beginning equity + contributions - dividends + profit
• How do you calculate trade receivables at the end of the year?

  Beginning TR + Credit sales - Cash collection
• If trade receivables at the beginning of the year are £800, credit sales are £700, and cash collection is £300, what are the ending trade receivables?

  £1,200
• How do you calculate ending inventory?

  Beginning Inventory + Purchases - COGS
• If beginning inventory is £1,500, purchases are £1,400, and COGS is £2,000, what is the ending inventory?

  £900
• How do you calculate trade payables at the end of the year?

  Beginning TP + Credit Purchase - Payment to supplier
• If trade payables at the beginning of the year are £800, cash payment to suppliers is £700, and ending trade payables are £600, what is the credit purchase during the year?

  £500
• What is the relationship between revenues and expenses in profit calculation?

  Profit = Revenues - Expenses
• What is the significance of recognizing expenses when incurred?

  It matches expenses with related revenues
• What is the formula for gross profit?

  Gross profit = Sales revenue - COGS
• What does profit before tax represent?

  Wealth generated before taxes are deducted
• What is the role of depreciation in expenses?

  Allocates costs of non-current assets over time
• How do cash payments for assets differ from expenses?

  Assets are not expenses until used
• What is the formula for calculating net profit?

  Net profit = Profit before tax - Taxes
• What are the four profit numbers in an income statement?

  • Gross profit = Sales revenue - COGS
  • Operating profit = Gross profit - Operating expenses
  • Profit before tax = Operating profit + non-operating income - non-operating expenses
  • Net profit = Profit before tax - taxes
• What are the key components of the income statement?

  • Revenues
  • Expenses
  • Profit or Loss
  • Total equity
• What is the expanded accounting equation?

  • Assets = Liabilities + Equity
  • Equity = Contributed capital + Retained earnings
• How do you record transactions in the expanded accounting equation?

  1. Identify the accounts affected
  2. Determine the increase or decrease
  3. Apply the accounting equation
• What is the significance of trade receivables and trade payables?

  • Trade receivables: Amounts owed by customers
  • Trade payables: Amounts owed to suppliers
• What is the impact of cash sales and credit sales on the income statement?

  • Cash sales: Immediate revenue recognition
  • Credit sales: Revenue recognized when goods delivered
• What are the implications of recognizing revenue and expenses?

  • Revenue recognized when earned
  • Expenses recognized when incurred
• How do capital contributions and dividends affect total equity?

  • Capital contributions increase equity
  • Dividends decrease equity
• What is the relationship between inventory purchases and COGS?

  • Inventory increases with purchases
  • Inventory decreases with COGS
• How do operating expenses affect operating profit?

  • Operating expenses reduce operating profit
  • Higher expenses lead to lower profit
• What is the role of non-operating income and expenses in profit calculation?

  • Non-operating income adds to profit
  • Non-operating expenses reduce profit
• How does the income statement reflect a company's performance?

  • Shows profitability over a period
  • Highlights revenue and expense management
• What is the significance of the cash flow statement in relation to the income statement?

  • Cash flow statement shows actual cash movement
  • Income statement shows profitability regardless of cash flow