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Accounting, 3rd Edition by Michael J. Jones

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Chapter 4

Main financial statements: The Income Statement (Profit and Loss Account)

‘Around here you're either expense or you're revenue.’

Donna Vaillancourt, Inc. (March 1994) The Wiley Book of Business Quotations (1998), p. 90.

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Learning Outcomes

After completing this chapter you should be able to:

  • Explain the nature of the income statement.
  • Understand the individual components of the income statement.
  • Outline the layout of the income statement.
  • Evaluate the nature and importance of profit.

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Chapter Summary

  • One of three main financial statements.
  • Consists of revenue, cost of sales and other expenses.
  • Cost of sales is essentially opening inventory plus purchases less closing inventory.
  • Gross profit is revenue less cost of sales.
  • Net profit is income less cost of sales less other expenses.
  • Profit is determined by income earned less expenses incurred not cash received less cash paid.
  • Profit is an elusive concept.
  • Capital expenditure (i.e., on non-current assets such as motor vehicles) is treated differently to revenue expenditure (i.e., an expense such as telephone line rental).
  • Profit is useful when evaluating an organisation's performance.

Introduction

The income statement (often known ...

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