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Study Smarter.....Study The Answers!

Income Statement

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn 7) On Your Test
4) Easy Practice Test 8) Quick Study Sheet

 

Key Things to Know

 Revenues:   Provide goods or services to customers in return for an asset (cash)
 
            The revenue principle:  4 criteria that must be met for revenue to be recognized
 
                        1)  Delivery of goods has occurred or a service has been rendered
                        2)  Persuasive evidence of arrangement for customer payment
                        3)  The price is fixed and determinable
                        4)  Collection is reasonably assured
 
            Revenue is NOT recognized when cash is received.
 
 
Expenses:   Use an asset to generate revenues, “incurred” when
                        1)  an asset is used up
                        2)  a service is provided to the company that must be paid for
 
            Expenses are recognized when incurred, NOT when they are paid
 
              (Recognize means to record and report in the financial statements)
 
 
The Matching Principle:   Expenses incurred to generate revenues must be
                                             recognized in the same period as the revenue
 
            examples:      Wages and salary expense is recorded for the period the
                                    employees work to produce revenues
                                    Depreciation expense is recorded for the period the long term
                                    asset is used to produce revenues
                                    Interest expense is recorded for the period the money is used
                                    to produce revenues
                                    Utility expense is recorded for the period the utilities are used
                                    to produce revenues
                                    Bad debt expense is recorded in the period the sale occurred
 
            Revenues are recorded when earned and expenses are recorded when incurred
             to produce the revenues.
 
 
Accrual Basis of Accounting:
 
            Revenues are recorded when earned and expenses are recorded when incurred.
                        When the cash is received or paid DOES NOT Matter
 
 
Format of the Single Step Income Statement:   For a period of time
 
      List all revenues and subtotal, list all expenses and subtotal:
 
            Sales
            Interest income
            Rent income
                        Total revenues
 
            Cost of Goods sold
            Selling expenses
            Administrative expenses
            Interest expense
            Rent expense
                        - Total expenses
 
            = Net Income
           
 
Format of the Multi-Step Income Statement:   For a period of time
 
               Sales
            -  Cost of Goods Sold                     
            = Gross Profit
            -  Operating Expenses:
                 General and Administrative
                 Selling
                 Research & Development
                 Restructuring                              
            = Operating Income
            + - Other Revenues & Expenses:
                 Interest Income or Expense
                 Rent Income
                 Unusual Gains and Losses
                 Realized/Unrealized Gains/Losses on Investments
                 Gain/loss on Sale of an Asset
            = Income Before Taxes:
              - Tax Expense                                           
            = Income from Continuing Operations
            + - Discontinued Operations:
            + - Extraordinary Items
                                                                                   
             =  Net Income
                                                                                                           
 
Terms related to the income statement:
 
Gross Profit:   Sales price less the cost to buy or manufacture the goods sold
                        This is the profit made from selling inventory only.
                             This profit is used to pay operating expenses
 
Operating Expenses:   Directly related to day to day business operations
                                         Related to:
                                                1)  Selling – sales employees, marketing, advertising
                                                2)  Administrative – expenses to run the organization
                                                3)  Research & Development – to develop new products
                                                4)  Restructuring of operations – to reduce future expenses 
 
Operating Income:  Sales   less     Cost of Goods Sold     less     Operating expenses
 
            This is what is earned from day to day business that is expected to
               continue in the future as the business continues
 
 
Other Revenues/Expenses:  the result of a transaction that is not part of your
                                                primary day to day business
        Examples:
            Interest expense:     a cost of borrowing money
            Gains/Losses:          resulting from selling assets you no longer use
                                                        or disposal or destruction of an asset
            Rent Income:           earn from leasing excess space, not your primary business
            Interest income:       earn from excess cash, not your primary business
            Dividend income:     earn from investing excess cash when investing is not
                                                your primary business
 
Tax Expense:            Reported separately.  Not an expense that management
                                  can control since it is government mandated.
 
Income from Continuing Operations:   An indication of income that can be earned
                                                               in future years – used for trend analysis
 
Discontinued Operations:  Selling or disposing of a major part of the business
                                             - product line           -geographic area
 
Extraordinary Item:  “Unusual and Infrequent” – not expected to happen again
 
 
Net Income:                Total earnings of the company for this period
 
 
 
Cash Basis vs. Accrual Basis
 
 
Cash Basis:                                                
 
Revenues:   record when cash is received for providing goods or services
 
Expenses:   record when cash is paid for something provided to the company
                        - can be an asset or a service
 
 
 
Accrual Basis:
 
Revenues:   recorded when earned, the goods or services are provided
 
Expenses:    recorded when incurred; use up an asset or a service was
                       provided to the company
 
 
 
            GAAP requires the accrual basis of accounting in order
             to follow the matching principle
 
                               When cash is paid or received does not matter
 
                                  Revenues are recorded when earned
                                  Expenses are recorded when incurred

 


 

 

 

 
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