Income Statement and Statement of Financial Position

What is the income statement

-a historical record of the trading of a business over a specific period (usually one year)

-shows the profit or loss made by the business

What is revenue

-the sales made by the business

What’s cost of sales

-how much it costs to make or buy the products that have been sold to generate sales revenue

-including costs of raw materials, components and direct labour costs of production

-DIRECT costs

What’s gross profit

-the first measure of profit

-shows the difference between revenue and cost of sales

What’s operating profit

-a key measure of profit

-records how much profit has been made in total from the trading activities, but before any account is taken of how the business is financed

What is profit before tax

-this is the profit the business has made before paying tax

-this can be used to measure the businesses efficiency

-it indicates how much gross profit was used up in all other costs of running the business

What’s profit quality

-an income statement reports whether the profit is ‘high quality’ or ‘low quality’

-a high quality profit is one which can be repeated or sustained

-a low quality profit is one which it is difficult to repeat, the profit is likely to benefit from one or more ‘exceptional items’ which will not repeat

What is the statement of financial position

-a snapshot of a businesses assets and its liabilities

-also called a balance sheet

What are the main sections of SOFP

-non-current assets

-intangible assets

-current assets

What are non current assets

-what the business owes

-assets kept for a long term use

-a business holds onto it for more than a year

What are intangible assets

-non physical assets like goodwill

-only purchased intangibles are shown

What are current assets

-what the business owns

-expected to turn into cash within 12 months

What are trade receivables

-an expense the business has to cover

-‘bad debts’

-normally known as trade debtors

What are trade payables

-money owed to suppliers

What are non current liabilities

-long term debts (e.g loans, mortgages)

What is share capital

Money raised from selling shares

What are retained earnings

Profits kept in the business

What’s the purpose of the statement of financial position

-helps stakeholders to assess the financial strength of a business

-should be studied over time and make comparisons

-comparisons should also be made between competitors balance sheets to draw valid conclusions