6.1 Income statement preparation

• An income statement reports the financial performance of a business over a specific period of time
• Match the component of an income statement with its description:

  Revenue ↔️ Total money from sales

  Expenses ↔️ Costs incurred in generating revenue

  Profit/Loss ↔️ Overall financial performance
• The main revenue sources for a sole trader's business include sales of goods, sales of services, commission income, and rental income
• An income statement shows the assets and liabilities of a business.

  False
• Steps for preparing an income statement

  1️⃣ Record revenue transactions

  2️⃣ Record expense transactions

  3️⃣ Categorize expenses as direct or indirect

  4️⃣ Calculate gross profit

  5️⃣ Calculate net profit
• Gross profit is calculated using the formula: Revenue - Direct Expenses
• What is the formula to calculate gross profit?

  Gross Profit = Revenue - Direct Expenses
• Why is calculating gross profit important in preparing an income statement?

  Provides insight into core profitability
• What is the purpose of an income statement?

  Report financial performance
• Match the revenue source with its description:

  Sales of goods ↔️ Revenue from selling physical products

  Sales of services ↔️ Revenue from providing professional services

  Commission income ↔️ Revenue earned for facilitating transactions

  Rental income ↔️ Revenue from leasing property or equipment
• What are examples of direct expenses?

  Cost of materials, direct labor
• Gross profit is the profit made after accounting for all expenses.

  False
• Net profit is calculated after deducting all expenses from gross profit.


  True
• The income statement reports the financial performance of a business over a specific period of time.
• An income statement typically covers a period of one
• Match the income statement component with its description:

  Revenue ↔️ Money from selling goods or services

  Expenses ↔️ Costs incurred in generating revenue

  Profit/Loss ↔️ Overall financial performance
• Revenue from providing professional or consulting services is classified as sales
• What is the formula for gross profit?

  Revenue - Direct Expenses
• Arrange the following items in the order they would appear in an income statement:

  1️⃣ Revenue

  2️⃣ Direct Expenses

  3️⃣ Gross Profit

  4️⃣ Indirect Expenses

  5️⃣ Net Profit
• Gross profit is the difference between revenue and direct expenses
• Why is an income statement considered crucial for a business?

  Reports financial performance
• The main revenue sources for a sole trader's business include sales of goods, sales of services, commission income, and rental
• What is the formula for calculating gross profit?

  $\text{Revenue} - \text{Direct Expenses}$
• Net profit represents the true profitability of a business.


  True
• Expenses can be categorized as either direct expenses or indirect expenses.
• What is an example of a direct expense for a sole trader's business?

  Cost of materials
• What is the formula for calculating net profit?

  $\text{Gross Profit} - \text{Indirect Expenses}$
• Gross profit is the difference between revenue and direct expenses.
• Match the expense category with its description:

  Direct Expenses ↔️ Costs directly related to producing goods or services

  Indirect Expenses ↔️ Costs supporting overall business operations
• What is the purpose of an income statement?

  Report financial performance
• An income statement typically covers a year-long period.


  True
• Why is an income statement crucial for a sole trader?

  Provides insight into profitability
• Match the revenue source with its description:

  Sales of goods ↔️ Revenue from physical products

  Sales of services ↔️ Revenue from professional services

  Commission income ↔️ Revenue for facilitating transactions

  Rental income ↔️ Revenue from leasing property
• The profit or loss in an income statement is the difference between revenue and expenses
• What is gross profit?

  Revenue minus direct expenses
• Gross profit represents the profitability of core business activities.


  True
• Gross profit is calculated before accounting for indirect expenses.
• Gross profit represents the profit made after accounting for all expenses.

  False
• The main components of an income statement are revenue, expenses, and profit or loss.
• Direct expenses are directly related to the production of goods or provision of services.