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Flip to reveal answersState the three key income statement formulas
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All 30 Flashcards — Profit and loss accounts
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Question
State the three key income statement formulas
Answer
GP = Revenue − COGS. NP = GP − Expenses. COGS = Opening stock + Purchases − Closing stock.
💡 Hint
Three formulas: GP, NP, COGS
Question
High gross profit but low net profit suggests what?
Answer
Expenses (overheads) are too high — poor cost control.
💡 Hint
Overhead problem
Question
What is the formula for COGS?
Answer
COGS = Opening stock + Purchases − Closing stock
💡 Hint
Opening + Bought − Left over
Question
List the income statement structure from top to bottom
Answer
Sales revenue → minus COGS → Gross profit → minus Expenses → Net profit → minus interest/tax → Profit for the year.
💡 Hint
Revenue at top, subtract layers
Question
What is a profit and loss account?
Answer
A financial statement showing revenue, costs and profit/loss over a specific period (usually one year). Also called an income statement.
💡 Hint
Also called an income ___
Question
Revenue $120,000, COGS $48,000. What is gross profit?
Answer
$120,000 − $48,000 = $72,000
💡 Hint
Revenue minus COGS
Question
Low gross profit suggests what?
Answer
COGS is too high or selling prices are too low.
💡 Hint
Pricing or COGS issue
Question
What is another name for the profit and loss account?
Answer
Income statement — the IB uses both terms interchangeably.
💡 Hint
Think income
Question
What is the formula for gross profit?
Answer
Gross profit = Sales revenue − Cost of goods sold (COGS)
💡 Hint
Revenue minus direct costs
Question
Gross profit $72,000, total expenses $52,000. What is net profit?
Answer
$72,000 − $52,000 = $20,000
💡 Hint
GP minus expenses
Question
Opening stock $10k, purchases $50k, closing stock $8k. Calculate COGS.
Answer
$10,000 + $50,000 − $8,000 = $52,000
💡 Hint
Add opening + purchases, subtract closing
Question
What two skills must you master for income statement questions?
Answer
Construction (building the statement) AND interpretation (explaining what figures mean).
💡 Hint
Build it + explain it
Question
What do you always start with at the top of an income statement?
Answer
Sales revenue — then subtract costs layer by layer to reach net profit at the bottom.
💡 Hint
Top line is always ___
Question
What is the formula for net profit?
Answer
Net profit = Gross profit − Expenses (overheads)
💡 Hint
GP minus indirect costs
Question
Name two ways to put profit figures in context
Answer
Compare with previous years (improving or declining?) and compare with competitors (above or below industry?).
💡 Hint
Time + rivals
Question
What is the difference between gross profit and net profit?
Answer
GP only deducts COGS (direct costs). NP also deducts all expenses/overheads (indirect costs).
💡 Hint
Direct vs all costs
Question
What does COGS represent?
Answer
The direct cost of products actually sold during the period — not everything purchased.
💡 Hint
Cost of what was actually sold
Question
What key question does the income statement answer?
Answer
Did the business make money or lose money over the period?
💡 Hint
Make or ___?
Question
In the exam, what should you do beyond stating numbers?
Answer
EXPLAIN what they mean and SUGGEST what the business should do — this reaches higher mark bands.
💡 Hint
State → Explain → Suggest
Question
Why compare profit figures rather than look at them alone?
Answer
Raw numbers lack context — comparisons over time and with competitors reveal the real story.
💡 Hint
Context through comparison
Question
Name two stakeholders who use the income statement
Answer
Managers (decision-making) and investors (assess profitability). Also banks, employees, suppliers and tax authorities.
💡 Hint
Who cares about profit?
Question
What does COGS stand for?
Answer
Cost of Goods Sold — the direct costs of the products actually sold during the period.
💡 Hint
Direct costs of products
Question
If net profit is negative, what does this mean?
Answer
The business made a net loss — total costs exceeded total revenue.
💡 Hint
Negative profit = ___
Question
Why subtract closing stock in the COGS formula?
Answer
Closing stock is still unsold in the warehouse — it hasn't been used up in sales yet.
💡 Hint
Still on the shelf
Question
Does the income statement cover a point in time or a period?
Answer
A period of time (e.g. year ending 31 Dec 2025) — unlike the balance sheet which is a snapshot.
💡 Hint
Period vs snapshot
Question
This period's closing stock becomes next period's ___?
Answer
Opening stock — it carries forward as the starting inventory.
💡 Hint
Closing becomes ___
Question
What does a net loss tell you?
Answer
Total costs exceed revenue — the business is losing money and must increase revenue or cut costs.
💡 Hint
Costs > Revenue
Question
Why is neat presentation important when constructing an income statement?
Answer
Clear labels and showing every calculation step earns marks and reduces errors.
💡 Hint
Labels + every step
Question
Give two examples of expenses (overheads)
Answer
Rent, wages, marketing, utilities, depreciation — any indirect cost of running the business.
💡 Hint
Indirect running costs
Question
Quick recall: Revenue minus COGS = ?
Answer
Gross profit
💡 Hint
First profit line
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