Income statement

• What are income statements sometimes called?

  Profit and loss accounts
• Why are income statements prepared for legal reasons?

  To determine tax obligations on profits
• How can income statements help managers?

  By comparing profits over previous years
• Why might a business compare its income statement to rivals?

  To assess performance within the industry
• How can income statements assist investors?

  By providing insights for investment decisions
• What are the three main financial statements?

  Income statement, statement of financial position, cash flow forecast
• What does the pound sign followed by zeros indicate in financial statements?

  Thousands
• What is the top line of the income statement called?

  Sales revenue
• How is sales revenue calculated?

  Price times quantity for each product
• What is the cost of sales?

  Costs directly attributed to product production
• If sales revenue is £200,000 and cost of sales is £50,000, what is the gross profit?

  £150,000
• What are operating expenses?

  Ongoing day-to-day expenses not directly attributed to products
• What is the operating profit?

  Profit after deducting operating expenses from gross profit
• If gross profit is £150,000 and operating expenses are £100,000, what is the operating profit?

  £50,000
• What does net finance costs refer to?

  Costs associated with loans and interest payments
• If operating profit is £50,000, profit from other activities is £10,000, net finance costs are £15,000, and tax is £5,000, what is the net profit?

  £40,000
• Why might an increase in cost of sales not be a bad thing?

  It may indicate increased sales revenue
• What could happen if a business reduces the cost of sales?

  Quality may decrease, affecting sales
• How can increasing marketing expenses affect operating profit?

  It may increase operating expenses without affecting gross profit
• What does operating profit indicate?

  Day-to-day profit excluding finance costs and taxes
• Why is profit for the year considered a more overall indicator?

  It accounts for all costs and activities
• How are income statements useful for ratio analysis?

  They provide data for financial performance ratios