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6. Finance
6.4 Analysing the financial performance of a business
Components of an income statement:
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Sales revenue is calculated as total units sold multiplied by the
price per unit
.
True
Revenue is the first line item on an
income statement
.
True
Gross profit is earned after deducting COGS from sales
revenue
Match the terms with their definitions:
Gross Profit ↔️ Profit after deducting COGS
COGS ↔️ Direct costs of producing goods
Operating expenses reduce gross profit to calculate net
profit
Operating Expenses are directly related to the production of goods or services.
False
The Income Statement summarizes a business's financial performance over a specific period.
True
What is Gross Profit calculated as in an Income Statement?
Sales Revenue - COGS
COGS represents the direct costs associated with producing goods or
services
Gross Profit is calculated by subtracting COGS from
Revenue
Increased sales prices have a positive effect on Gross Profit.
True
Salaries and wages are examples of
Operating Expenses
.
True
Operating Profit reflects a
company's
profitability from its core business activities.
True
Interest Expenses reduce
Net Profit
.
True
Net Profit represents the final profit figure after all
expenses
and taxes are deducted.
True
Net Profit is significant for business decisions and investor evaluations.
True
Gross Profit on an Income Statement is calculated as Sales Revenue -
COGS
Match the income statement component with its description:
Sales Revenue ↔️ Total income generated from sales
Cost of Goods Sold (COGS) ↔️ Direct costs of producing goods
Gross Profit ↔️ Profit after deducting COGS
Net Profit ↔️ Profit after deducting all expenses
Gross profit is calculated by subtracting COGS from
Sales
Steps to calculate gross profit
1️⃣ Calculate total revenue
2️⃣ Calculate cost of goods sold
3️⃣ Subtract COGS from revenue
4️⃣ Result is gross profit
Lower COGS can increase gross profit.
True
What are interest expenses?
Costs for borrowing money
Why is profit before tax a significant metric?
Excludes taxation impact
What is the formula for calculating Profit Before Tax (PBT)?
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Gross Profit - Operating Expenses - Interest Expenses
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PBT facilitates better comparisons and decision-making by showing core
profitability
without tax considerations.
True
Taxes are calculated as a percentage of
Profit Before Tax (PBT)
.
True
Net Profit is calculated by subtracting taxes from
PBT
What do Operating Expenses include?
Salaries, rent, utilities
Net Profit is calculated by subtracting taxes from PBT.
True
Gross profit is calculated as sales revenue minus the cost of
sales
Cost of Goods Sold (COGS) represents the direct costs associated with producing
goods
What is the formula for calculating revenue?
Total units sold x Price per unit
Gross profit is calculated as revenue minus
COGS
.
True
What is Net Profit calculated from in a business?
Gross Profit - Operating Expenses
What is Operating Profit calculated as?
Gross Profit - Operating Expenses
How is Sales Revenue calculated in an Income Statement?
Total units sold x Price per unit
Net Profit is calculated by subtracting all expenses from
Gross Profit
.
True
What is the formula for calculating COGS?
Beginning Inventory + Purchases - Ending Inventory
What is the impact of operating expenses on Net Profit?
Reduces Net Profit
If a company has revenue of $200,000 and COGS of $80,000, the Gross Profit is $
120,000
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