Topic 4: The Income Statement
Economic Value Added
A system of earnings-based compensation
goods are delivered to the customer.
A wholesale bakery would normally recognize revenue when
Expanded Accounting Equation
Analysis of revenue and expense transactions requires the use of the:
Expanded Accounting Equation
Assets = Liabilities + Paid-in Capital (revenues - expenses - dividends)
Net income divided by total number of shares of stock outstanding
Earnings per share is equal to
both unusual and infrequent
For a gain or loss to be classified as extraordinary, it must be
extraordinary items
Gains and losses that result from transactions that are both unusual in nature and infrequent in occurrence
at the point of sale.
Generally, recognition criteria are met and revenues are recognized
A. $1,450
Given the following information, compute income from continuing operations - Cost of Goods Sold $2,000 Extraordinary Item -170 Income Taxes 350 Interest Expense 200 Operating Expenses 1,500 Sales 5,500 A. $1,450 B. $1,280 C. $3,500 D. $2,000
D. $1,170
Given the following information, compute net income - Extraordinary Loss -80 Income Taxes 150 Interest Expense 100 Operating Income 1,500 Unrealized Gain not included in Net Income 120 A. $1,290 B. $1,500 C. $1,250 D. $1,170
C. $2,000
Given the following information, compute operating income - Cost of Goods Sold $2,000 Extraordinary Item -170 Income Taxes 350 Interest Expense 200 Operating Expenses 1,500 Sales 5,500 A. $3,500 B. $1,280 C. $2,000 D. $1,450
Sales and Cost of Goods Sold
Gross profit is the difference between -
accounts payable
If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in
sales
Most forecasting exercises begin with a forecast of
discontinued operations
Report the Hughes results in a separate category called income from discontinued operations.
Net income
The accountant's attempt to summarize in one number the overall economic performance of a company for a given period.
loss
The amount of a company loses money on activities that are peripheral to its primary operations
gain
The amount of a company makes money on activities that are peripheral to its primary operations
earnings per share (EPS)
The amount of net income associated with each share of stock.
financial capital maintenance
The approach that accountants typically use in computing a company's income is the first option described above in which inflation is ignored and a company is said to have income when its financial resources increase.
matching
The concept typically used in practice to determine when an expense should be recognized
gross profit
The difference between the selling price of the product and the cost of the product.
restructuring charges
The fact that companies have exercised considerable discretion in determining the amount and timing of a restructuring charge.
D. $0.40
The following information was taken from the records of Merle Corporation for the period ending December 31, 2012: Advertising expense $1,200 Equipment 800 Accounts receivable 1,500 Notes payable 6,000 Retained earnings 8,420 Utilities expense 1,385 Revenues 4,620 Dividends 975 Interest receivable 125 Rent expense 655 Assuming that 3,450 shares of stock are outstanding, earnings per share is approximately A. $0.23 B. $1.40 C. $0.27 D. $0.40
multiple-step income statement
The multi-step income statement includes multiple sub-totals within the income statement.
Comprehensive income
The number used to reflect an overall measure of the change in a company's wealth during the period
Operating income
The performance of the fundamental business operations conducted by a company
Accrual accounting
The process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance.
gross profit, operating income, income from continuing operations, net income, comprehensive income
The proper order on an income statement for the various measures of income is -
expenses
The value of resources used in generating the reported revenue.
revenue
The value of the goods and services provided by a company in its business operations.
New Zealand
Thus far, the only national government to adopt the accrual basis for its official accounting system is ______.
cost of goods sold
When a business sells goods to customers, the cost of the goods sold is recorded as an expense
Revenues and expenses from that line of business are excluded from the company's recurring revenues and expenses when preparing an income statement.
When a company determines to get out of a specific line of business
multiple-step income statement
When revenue and expense items are arranged to highlight important profit relationships, the resulting income statement format is called a -
C. The salary of the company president
Which of the following categories of expenses is subject to immediate recognition on the income statement? A. Utilities expense for the production line of a manufacturer B. Repairs and maintenance expense incurred on production equipment of a manufacturer C. The salary of the company president D. The salary of the production foreman
C. Depreciation expense
Which of the following is an application of the principle of systematic and rational allocation? A. Telephone expense B. Sales commissions C. Depreciation expense D. Office salaries
D. For the Year Ended December 31, 2012
Which of the following is the correct way to date an income statement? A. At December 31, 2012 B. As of December 31, 2012 C. December 31, 2012 D. For the Year Ended December 31, 2012
A. Immediate recognition
Which of the following principles best describes the rationale for matching administrative and selling expenses with revenues of the current period? A. Immediate recognition B. Partial recognition C. Systematic and rational allocation D. Direct matching
D. All of the statements are true
Which of the following statements is true regarding retained earnings? A. Increasing revenues will increase retained earnings B. Increasing expenses will decrease retained earnings C. Increasing dividends will decrease retained earnings D. All of the statements are true
False
With a multiple-step income statement all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between the two.
True
With a single-step income statement all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between the two.
single-step income statement
With this format, all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between total revenues and total expenses.
Cash, Accounts Receivable
____ is increased and ____ is decreased when cash is collected from customers who had previously purchased a product or service on account.
Cash dividends
______ is/are not considered to be an expense of doing business.
Revenue recognition
a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized.
physical capital maintenance
income is earned only when one experiences an increase in actual physical resources.
Income from continuing operations
the segments of a company's business that it considers to be normal, and expects to operate in for the foreseeable future