Research has shown that active recall, pushing yourself to recall new information rather than simply going over it again, has a big positive impact on learning and long-term memory. Also by trying to answer questions, you gain new insights and expose gaps in your knowledge.
So here is a short active recall activity. Click on the heading to check your answer.
The Income Statement, often referred to as the Profit and Loss account, is a record of a business’s trading performance over a period of time. It has the basic structure:
sales less cost of sales less expenses = profit
There are several profit calculations. In the trading income statement, expenses such as interest and depreciation are ignored. To get to the final profit figure, retained earnings, tax and dividends are deducted.
COS (Cost of Sales) and COGS (Cost of Goods Sold) are the costs associated directly with sales. The main categories of costs included are:
Only the direct materials cost is a variable cost that fluctuates with revenue levels, and so is an undisputed component of the cost of goods sold. Direct labor can be considered a fixed cost, rather than a variable cost, since a certain amount of staffing is required in the production area, irrespective of production levels. Nonetheless, direct labor is considered a part of the cost of goods sold. Factory overhead is a largely fixed cost, and is allocated to the number of units produced in a period.
Selling and administrative costs are not included in the cost of goods sold; instead, they are charged to expense as incurred.
Earnings Before Interest Tax Depreciation and Amortization (EBITDA) is the operating profit – in other words the money that the company makes from its normal operations. It is sometimes known as the manager’s profit line because it excludes costs beyond the manager’s control – interest, tax, depreciation and amortization.
Depreciation is the method by which the cost of a capital asset is spread over the asset’s life.
For example, if a vehicle is purchased for $15,000 in year one and is expected to be retained for five years, it would present a distorted picture of the firm’s financial status if the whole $15,000 was taken off the profit for year one. If this were the case, years two to five would have the use of the vehicle at no cost – and that would violate the matching principle (costs should be tied to the sales to which they relate).
There are four factors to consider:
In our example, an asset is bought for £100,000 and it is anticipated that it will be sold in 5 years’ time for a price of £20,000. The three most common depreciation methods are shown:
Amortization is the depreciation of an intangible – that is, an asset that doesn’t have a physical presence. Examples include patents, copyrights and goodwill.
The company may have