Revenue, cost of sales and gross profit

Overview

The income statement, sales revenue and fee income, cost of sales with inventory, gross profit with worked figures, and why gross profit can fall as revenue rises.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is an income statement?

   Model answer

   An income statement shows a business's revenue, costs and profit or loss over a period, usually a year. The older name is the trading and profit and loss account.

2. 2

   What is sales revenue?

   Model answer

   Sales revenue is the value of the goods or services sold in the period. Revenue equals the selling price multiplied by the quantity sold.

3. 3

   How does a consultancy earn its sales revenue?

   Model answer

   A consultancy earns revenue as fees for the work it does for clients. Fee income is often the hours billed multiplied by the hourly rate.

4. 4

   A Belfast consultancy bills 2,400 hours in a year at £85 an hour. What is its sales revenue?

   Model answer

   The sales revenue is £204,000. The working is 2,400 × £85 = £204,000.

5. 5

   What is cost of sales?

   Model answer

   Cost of sales is the direct cost of the goods or services sold in the period. Cost of sales is also called cost of goods sold.

6. 6

   How is cost of sales calculated for a business that holds inventory?

   Model answer

   Cost of sales equals opening inventory plus purchases minus closing inventory. Closing inventory is deducted because those goods are still unsold.

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