Income statements and statements of financial position

Overview

Revenue, cost of sales, gross profit, expenses and net profit worked through a shoe shop, assets and liabilities, current and non-current items, net assets, and how the two statements differ.

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

   Why are financial statements important?

   Model answer

   Financial statements show how well a business is performing and how financially secure it is. Owners, managers, banks and investors use financial statements to make decisions.

2. 2

   What is an income statement?

   Model answer

   An income statement shows a business's revenue, costs and profit over a period of time, usually a year. An income statement used to be called a profit and loss account.

3. 3

   What are the main components of an income statement?

   Model answer

   An income statement shows revenue, cost of sales and gross profit. The statement then deducts expenses to show net profit.

4. 4

   What is cost of sales?

   Model answer

   Cost of sales is the direct cost of making or buying the goods a business has sold. For a shop, cost of sales is what it paid for the stock it sold.

5. 5

   What is gross profit?

   Model answer

   Gross profit is revenue minus cost of sales. Gross profit shows the profit made on trading before other expenses are paid.

6. 6

   What are expenses in an income statement?

   Model answer

   Expenses are the costs of running the business that are not part of cost of sales. Rent, salaries, advertising and interest are examples.

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