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Hello SiR….
Could you please help me explaining what are actually operating expenses and income?Are they not the expenses and income from our production of the business?
It slightly depends on the context of the particular question. However the operating expenses are the expenses of operating the business (i.e. the expenses of running the business). So usually the operating income is all the income earned from running the business (so not including other income such as any interest earned) and operating expenses are all the expenses of running the business (so not including things such as interest paid).
I couldn’t get that…
Sales = 100,000
less: cost = 40,000
Gross profit = 60,000
less: operating expenses = 20,000
add: operating income = 5000
Profit before interest and tax = 45,000
less: interest costs = 5000
Profit before tax = 40,000
less: Tax costs = 10,000
Profit after tax = 30,000I got few questions related to this example.
1. Is it correct that the operating expenses of ($20,000) includes all the other expenses that are used to run the business which are basically all the expenses that were spent in the production of the goods?
2. Is it correct that the operating income ($5000) includes all the other incomes that are used to run the business activities which are basically all the incomes earned other than the sales revenue of the business?
3. Is it also correct that dividend is paid from the Profit for the year of ($30,000) which will give us the balance of our net profit for the period. For example, a business declared to pay $10,000 to shareholders so we need to deduct this balance from our Profit for the year less dividend paid to get the net profit of $20,000 which will go to the retained earnings?
4. What stage of dividend is when we need to deduct or report the dividend balance on our financial statements and dividend is only reported in the notes to income statement, Is that true?
1. Given that here the operating expenses have been subtracted from the gross profit, they are not the cost of producing the goods but are all the other expenses (administration and distribution expenses).
2. Again, given that here the operating income has been added to the gross profit, it is all income apart from the revenue from sales of the goods (e.g. interest income). It should be called ‘other income’ not ‘operating income’.
3. Dividends do not affect the profit and do not appear in the SOPL. The appear on the Statement of Changes in Equity as a reduction in the Retained Earnings.
4. Dividends are recorded in the financial statements only when they are actually paid.
Have you watched all of my free lectures? All of this is explained in the lectures which are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Thank you very much!!!
1. Operating expenses are those expenses that are not used in producing the goods but they are used in running the business such as office rent etc
2. Other expenses are those expenses that are used in producing the goods but they are not used in running the business such as delivery costs to customers?
3. Operating income are all those incomes that are received directly from the revenue from sales of the goods that are used in running the business such as interest received?
4. Other income are all those income that are coming apart from the revenue from sales of the goods such as rental received?
5. Dividends are paid from the Net Profit balance but showed in the statement of changes in equity?
Are they all correct?
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