Accounting Chapter 5

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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


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