Accounting Chapter 5
other items in the income statement include
interest earned on investments ( revenue) and interest expenses
perpetual inventory system
inventory count at the end of the year, and is compared with the balance in inventory account at the end of the year and compared. Differences investigated
other items on the income statement are from
investing and financing
financial flexibility
ability to adapt to change
operating capability
ability to continue given level of operations
matching principle
all expenses must be matched in the same accounting period as the revenues they helped to earn.
permanent accounts
balance sheet accounts where balances carry forward from year to year
revenues _____ assets
increase
operating margins measures
cents per dollar after covering cost of products sold and operating costs. used to help recover investing and financing cost and may leave some prodfit
profit margin measures
cents per dollar that are profit for the company.
cost of goods sold equals
cost of beginning inventory + cost of net purchases - cost of ending inventory ( physical count at end of year)
expenses ____ assets
decrease
revenues ____ liabilities
decrease
perpetual inventory shows
good control
operating income equals
gross margin (gross profit) - total S.G.& A. expemses
markups
gross profit margin
operating expenses equal
gross profit margin - operating income
margins on the income statement include
gross profit, operating income and net income
net sales revenue equals
gross sales revenue - sales discounts - sales returns on allowances
periodic inventory system
if its not on hand it had been sold
when do you record expenses on the income statement for accrual accounting
in the month you used them up, when the expense occurs NOT WHEN CASH IS PAID
temporary accounts
income statement accounts, withdrawals account where balances are moved each year ( added or subtracted from owners equity)
expenses____ liabilities
increase
why is the income statement important? (4)
measures how company preformed over last period, shows results of managers decisions, shows trends over the long haul ( to predict future), and allows managers to adjust future operations
periodic inventory measures
not good control. no COGS or inventory
operating expenses measure
operating efficiency, lower is better between companies
gross profit equals
revenue - COGS
net sales equals
sales revenue - sales discounts, returns and allowances
when closing entries, to close revenue you
subtract them out and add them to owners capital
when closing entries, to close out expenses you
subtract them out and subtract them from owners capital
when closing entries, to close out withdrawls you
subtract them out and subtract them from owners capital
gross profit margin measures
the cents per dollar left over to cover operating expenses and other expenses to maybe increase net income
if the profit margin is higher then previous year or other companies then
they are doing better at controlling expenses related to sales
risk
uncertainty about future earnings
dual effects principle
when one account changes, another account ( or accounts) must change so that the equation remains in balance
accural accounting asks
when should revenues and expenses be paid?
when do you record revenues on the income statement for accrural accounting
when the sale is made and cash is recieved
