Intermediate Accounting I Unit Three WGU D103

What are the four subsections of the Operating Section of the income statement:

1. Sales 2. Cost of goods sold 3. Selling expenses 4. Administrative expenses

_____________ is a noncash item and is the process of allocating the cost of an asset in a systematic and rational manner to expense over an asset's useful life. Another noncash item is allowance for doubtful accounts

Depreciation

________is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. It is an estimate rather than a factual measurement of the expired cost.

Depreciation

What are common examples of accrued expenses?

Interest expense Rent expense Tax expense Salary expense

The procedure of associating income taxes with the specific item that directly affects the income taxes for the period. "let the tax follow the income."

Intraperiod Tax Allocation

What is true about the information provided in the income statement? It helps in evaluating the past performance of the enterprise. It helps in evaluating working capital. It can only be used for assessing current performance and is not predictive. It can be used to evaluate relationships when uncertainty about cash flows is minimal.

It helps in evaluating the past performance of the enterprise. Examining revenues and expenses indicates how the company performed and allows comparison of its performance to its competitors.

Advertising is often incorrectly classified as an administrative expense. The proper classification is a _______________.

selling expense

Freight-out. Delivery is often incorrectly classified as an administrative expense. The proper classification is a _____________.

selling expense

Supplies can be classified as an asset (inventory account), selling expense, or administrative expense. In order for supplies to be classified as an expense, the question would have to specifically indicate that selling expense relates to sales or office. For example, the designation supplies (office) indicates supplies is an administrative expense. On the other hand, the designation supplies (sales) indicates supplies is a _________________. If the question is silent on the designation, then supplies is classified as an asset (inventory account). If the question uses the designation supplies used, then supplies is classified as an inventory account.

selling expense

In a _______________, just two groupings exist: revenues and expenses. Expenses are deducted from revenues to arrive at net income or loss—a single subtraction.

single-step income statement

Adjustments for accruals are for _________ and accrued revenues.

accrued expenses

Expenses incurred but not yet paid or recorded at the statement date are called _________.

accrued expenses

Companies can prepare financial statements directly from the ______________.

adjusted trial balance

Every _______________________ will have an income statement account and a balance sheet account, and cash will never be part of the adjusting journal entry.

adjusting journal entry

The major types of adjusting entries are?

deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses).

Adjusting entries are classified as either ___________ or __________.

deferrals or accruals

With adjustments for deferrals a company converts an asset to an expense in the income statement over time by debiting an ________ and crediting the_____________.

expense account, prepaid asset account

We are using accrual accounting. Expenses are recorded in the same period they help a business earn revenue - regardless of when cash is paid.

expense recognition principle

Accrued expense is an expense incurred in the current accounting period but not yet paid and recorded. The company debits an ___________ account and credits a ___________ account.

expense, liability

If a company does not make an adjustment for these deferrals, the asset and liability are _______, and the related expense and revenue are _________.

overstated , understated

A __________ is an asset on the balance sheet that results from a company making advance payments for services or goods that will be used in the future.

prepaid expense

Adjustments for deferrals are for _______________ and ______________.

prepaid expenses and unearned revenues

Unusual or infrequent gains or losses Material unusual, infrequent, or both. Write-downs of receivables, inventories, property, and intangibles; restructurings; gains or losses from sales of assets used in business. Reported in _____________________

"Other revenues and gains" or "Other expenses and losses" section. (Not shown net of tax.)

To illustrate Earnings Per Share, assume that Lancer, Inc. reports net income of $350,000. It declares and pays preferred dividends of $50,000 for the year. The weighted-average number of common shares outstanding during the year is 100,000 shares. Lancer computes earnings per share of _________

$3

Ortiz Co. had the following account balances: Sales revenue $ 440,000 Cost of goods sold 220,000 Salaries and wages expense 30,000 Depreciation expense 60,000 Dividend revenue 12,000 Utilities expense 24,000 Rent revenue 60,000 Interest expense 36,000 Sales returns and allow. 33,000 Advertising expense 39,000 What would Ortiz Co. report as total expenses in a single-step income statement? $421,000 $409,000 $442,000 $189,000

$409,000 In a single step income statement, all expenses, regardless of sources are listed in the expense section of the income statement. Cost of Goods Sold, Salaries & Wages, Depreciation, Utilities, Interest, and Advertising are all expenses.

The limitations of an income statement are ?

(1) The statement does not include many items that contribute to general growth and well-being of a company. (2) Income numbers are often affected by the accounting methods used. (3) Income measures are subject to estimates.

Supplies are generally debited to an asset account when they are acquired. Recognition of supplies used is generally deferred until the adjustment process. At that time, what occurs next?

-A physical inventory (count) of supplies is taken. -The difference between the balance in the Supplies (asset) account and the cost of supplies on hand represents the supplies used (an expense) for the period.

Common types of unusual or infrequent gains and losses or both are

-Losses on write-down (impairment) of receivables; inventories; property, plant, and equipment; goodwill or other intangible assets. -Restructuring charges. -Other gains and losses from sale or abandonment of property, plant, and equipment. -Effects of a strike, including those against competitors and major suppliers. -Gains and losses on extinguishment (redemption) of debt obligations. -Gains and losses related to casualties such as fires, floods, and earthquakes. -Gains or losses on sale of investment securities.

A discontinued operation occurs when two things happen:

1. A company eliminates the results of operations of a component of the business. A component comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes. 2. The elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results. A strategic shift generally includes the disposal of (1) a major line of business, (2) a major geographical area, or (3) a major equity method investment.

The multiple-step income statement is composed of six sections that relate to different aspects of the earning process. The six sections in the order of their appearance on the income statement are:

1. Operating section. 2. Nonoperating section. 3. Income tax. 4. Discontinued operations. 5. Noncontrolling interest 6. Earnings per share

The nonoperating section of the income statement has two subsections:

1. Other revenues and gains 2. Other expenses and losses

The two types of deferrals are?

1. Prepaid expenses 2. Unearned revenues

What are some examples of unearned revenue?

A company now has a performance obligation (liability) to provide service to one of its customers. Items like rent, magazine subscriptions, and customer deposits for future service may result in unearned revenues.

What is classified as an unusual and infrequent gain or loss? Accrued Revenue Losses on inventory related to a plant fire A discontinued operation Prepaid insurance expense

A fire in the plant that results in losses is both unusual and infrequent.

What is true about the presentation of a single-step income? --Expenses are classified by functions, such as merchandising, selling and administration. --All income from operations figure is presented. --Interest revenue and rental revenue are reported as other revenues and gains. --Just two groupings exist - revenues and expenses.

A single-step income statement consists of only two sections - revenues & expenses

What does the single-step income statement emphasize? Operating and non-operating expenses The various components of income from continuing operations The gross profit figure Total revenues and total expenses

A single-step income statement consists of only two sections - revenues & expenses.

Cash 1,200 Unearned Pizza Revenue 1,200 To record 3-month pizza pre-payment from Wisdom Inc General Journal Entry Unearned Pizza Revenue 400 Pizza Sales 400 To record Wisdom Inc November pizza revenue Adjusting Journal Entry Q: Is this an accrual or a deferral?

A: It's a deferral - cash first, income statement later

Prepaid Insurance 18,000 Cash 18,000 To record the purchase of annual insurance policy General Journal Entry Insurance Expense 1,500 Prepaid Insurance 1,500 To record insurance expense for November 2021 Adjusted Journal Entry Q: Is this an accrual or a deferral?

A: It's a deferral - cash first, income statement later

Accounts Receivable 800 Pizza Sales 800 To record unbilled 12/31/21 pizza revenue General Journal Entry Cash 800 Accounts Receivable 800 To record January receipt of cash from 12/31/21 event Adjusting Journal Entry Q: Is this an accrual or a deferral?

A: It's an accrual - income statement first, cash later

Utilities Expense 1,500 Accounts Payable 1,500 To record December utilities expense General Journal Entry Accounts Payable 1,500 Cash 1,500 To pay December utilities bill (paid in January) Adjusting Journal Entry Q: Is this an accrual or a deferral?

A: It's an accrual - income statement first, cash later

Common examples of ______ are interest on notes payable, payroll taxes, and wages.

Accrued Expenses

Revenues for which the performance obligation has been satisfied, but for which cash has not yet been received.

Accrued Revenues

The two types of accruals are?

Accrued Revenues Accrued Expenses

Expenses incurred but not yet paid in cash or recorded.

Accrued expenses

Revenues for services performed but not yet received in cash or recorded.

Accrued revenues

Which of the following accounts are balance sheet accounts and which are income statement accounts? Accumulated Depreciation Accounts Receivable Allowance for Uncollectible Accounts Bad Debt Expense Cost of Goods Sold Depreciation Expense Gain on the sale of equipment Income Tax Expense Insurance Expense Prepaid Insurance Revenues Salaries Payable Salary Expense Unearned Revenue

Accumulated Depreciation BS Accounts Receivable BS Allowance for Uncollectible Accounts BS Bad Debt Expense IS Cost of Goods Sold IS Depreciation Expense IS Gain on the sale of equipment IS Income Tax Expense IS Insurance Expense IS Prepaid Insurance BS Revenues IS Salaries Payable BS Salary Expense IS Unearned Revenue BS

This is a contra asset account. A contra asset account offsets an asset account on the balance sheet

Accumulated Depreciation Equipment

A company records depreciation expense in a single account for each piece of equipment, such as trucks or machinery, and for all buildings. A company also establishes related accounts for each called ?

Accumulated depreciation accounts , such as Accumulated Depreciation—Trucks Accumulated Depreciation—Machinery Accumulated Depreciation—Buildings.

A trial balance prepared immediately after all adjustments have been posted. It shows the adjusted balance of all accounts at the end of the period.

Adjusted Trial Balance

_________ made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis.

Adjusting Entries Entries

__________achieve a proper recognition of revenues and expenses, so as to determine net income for the current period and to achieve an accurate statement of end-of-the-period balances in assets, liabilities, and equity accounts.

Adjustments

Is the expense item selling, administrative, or other? Depreciation expense (office furniture & equipment)

Administrative Expense

Is the expense item selling, administrative, or other? Insurance expense

Administrative Expense

Is the expense item selling, administrative, or other? Legal & professional services

Administrative Expense

Is the expense item selling, administrative, or other? Maintenance & repairs (office)

Administrative Expense

Is the expense item selling, administrative, or other? Office expense

Administrative Expense

Is the expense item selling, administrative, or other? Property tax expense

Administrative Expense

Is the expense item selling, administrative, or other? Salaries (officers)

Administrative Expense

When an expense is recorded, which are the three most likely credits?

Advertising Expense 2,000 Cash 2,000 cash paid in current period Advertising Expense 2,000 Accounts Payable 2,000 cash to be paid in the future Advertising Expense 2,000 Prepaid Expense 2,000 cash paid previously

What is an example of a selling expense? Salaries of senior executives Office salaries expense Advertising expense Cost of goods sold

Advertising expense is an expense related to the sale of product.

A company generally computes bad debts by adjusting ___________ to a certain percentage of the trade accounts receivable and trade notes receivable at the end of the period.

Allowance for Doubtful Accounts

Prior to adjustment in prepaid expenses, assets are overstated and expenses are understated. What needs to be debited and credited?

An adjusting entry for prepaid expenses results in a debit to an expense account and a credit to an asset account.

What can investors and creditors predict with the help of the information provided by the income statement? The extent of changing external conditions The amount of future cash flows Uncertainty of asset valuation fluctuations Customers who will provide future cash flows

An income statement can be used to predict (1) the amount of future cash flows, (2) the timing of future cash flows and (3) the uncertainty of future cash flows. However, Accounts Receivable, a balance sheet item, can be used to evaluate which customers may provide future cash flows.

What is an example of an accrued expense? Property taxes incurred during the year, to be paid in the first quarter of the subsequent year Office supplies purchased at the beginning of the year and debited to an expense account Depreciation expense Rent recognized during the period, to be received at the end of the year

Because the taxes are for the current year, but will not be paid until the subsequent year, it is necessary to create an accrual entry for the current year.

Record interest revenue earned for the period but not collected (received)

Debit Interest receivable XXX Credit Interest revenue XXX

Which of the following account types belong on the income statement? A. Assets, liabilities and equity B. Sales, cost of goods sold and inventory C. Revenues, expenses, gains and losses D. Revenues, expenses and deferred revenue

C. Revenues, expenses, gains and losses

When revenue is recorded, which are the three most likely debits?

Cash 100 cash received at the same time Pizza Sales 100 Accounts Receivable 100 cash expected in the future Pizza Sales 100 Unearned Revenue 100 cash received previously Pizza Sales 100

A concept that states that the net income figure should show only the regular, recurring earnings of the business.

Current Operating Performance Approach

Which of the following are common uses of the income statement? A. Evaluate the past performance of a company B. Provide a basis for predicting future performance C. Help assess the risk or uncertainty of future cash flows D. All of the above E. A & B only

D. All of the above

Which is most likely to be nonoperating activity for a pizza restaurant? A. Pizza sales B. Beverage sales C. Utilities expense D. Gain on sale of a pizza oven

D. Gain on sale of a pizza oven

What are limitations often associated with the income statement? A.Companies omit items from the income statement that they cannot measure reliably B.Income numbers are affected by the accounting methods employed C.Income measurement involves judgment D.All of the above

D.All of the above

An analysis of a Global Advertising Agency reveals that adjusting entries for the following were to be prepared as of March 31st of the current year. $1,900 was earned during the month but not yet billed to the customers. What is the journal entry for this adjustment?

Debit Accounts Receivable 1900 Credit Advertising Revenue 1900

Journalize the annual adjusting entry to be made after it was noted that the Company forgot to record a $600 service revenue on account.

Debit Accounts receivable 600 Credit Service revenue 600

Calculate and journalize the annual adjusting entry to be made after it was noted that 10% of the accounts receivable 21,500 before any adjustments will be uncollectible.

Debit Bad debt expense 2,150 Credit Allowance for doubtful accounts 2,150 121,500 x 10%

An analysis of a Global Advertising Agency reveals that adjusting entries for the following were to be prepared as of March 31st of the current year. The equipment is depreciated by $250 per month. What is the journal entry for this adjustment?

Debit Depreciation Expense 250 Credit Accumulated Depreciation - Equipment 250 Accumulated Depreciation is a Contra Asset Account and is increased with a credit.

Journalize the annual adjusting entry to be made after it was noted that the 2020 depreciation for the equipment is $350.

Debit Depreciation expense 350 Credit Accumulated depreciation - equipment 350

Record depreciation for the period.

Debit Depreciation expense XXX Credit Accumulated depreciation XXX

Record expense expired from a prepaid expense account.

Debit Expense XXX Credit Prepaid expense XXX

Adjustment of Expenses Insurance expired during the year equaled $2,341 Initial Entry Debit prepaid insurance 2341 Credit Cash 2341 What is the adjusting entry?

Debit Insurance Expense 2341 Credit Prepaid Insurance 2341

. Journalize the annual adjusting entry to be made after it was noted that $1,200 of insurance expired during the year.

Debit Insurance expense 1,200 Credit Prepaid insurance 1,200

An analysis of a Global Advertising Agency reveals that adjusting entries for the following were to be prepared as of March 31st of the current year. Interest of $400 is accrued on the Notes Payable. What is the journal entry for this adjustment?

Debit Interest Expense 400 Credit Interest Payable 400 Nothing is done with the cash in the assets account as the $400 has not been paid

The note payable is a 90-day note given to the bank on November 1, 2020 bearing interest at 10%. (Use 360 days for the denominator). Calculate and journalize the annual adjusting entry to be made to record interest at year-end. Round to the nearest whole dollar. Notes payable 5,000

Debit Interest expense 85 Credit Interest payable 85 [(5,000 x 10%) / 360 days] x 61 days (Nov and Dec)

Record interest accrued for the period but not paid.

Debit Interest expense XXX Credit Interest payable XXX

Adjustment of Expenses Rent of $480 was paid for next month and was originally recorded as an expense. Initial Entry Debit Rent expense 480 Credit Cash 480 What is the adjusting entry?

Debit Prepaid Rent 480 Credit Rent Expense 480

Calculate and journalize the annual adjusting entry to be made after it was noted that Company purchased a six-month storage unit on September 1, 2020, for $2,400. (The original entry was posted to the balance sheet account).

Debit Rent expense 1,600 Credit Prepaid rent 1,600 (2,400 / 6 months) x 4 months

Adjustment of Revenue Fees received in advance of $5,600 were originally recorded as revenue. Initial Entry Debit Cash 5600 Credit Revenue 5600 What is the adjusting entry?

Debit Revenue 5600 Credit Unearned Revenue 5600

The following information relates to the Wallstrom Company at the end of 2020: The accounting period is the calendar year. Employees are paid every Friday for the five-day week ending on that day. Salaries amount to $4,000 per week. The accounting period ends on a Tuesday. Using the information given above, what is the necessary adjusting entry at December 31, 2020? -Debit Salaries & Wages Expense, Credit Salaries & Wages Payable; $2,285 -Credit Salaries & Wages Expense, Debit Salaries & Wages Payable; $1,600 -Debit Prepaid Expense, Credit Salaries & Wages Payable; $1,600 Correct -Debit Salaries & Wages Expense, Credit Salaries & Wages Payable; $1,600

Debit Salaries & Wages Expense $1,600 Credit Salaries & Wages Payable; $1,600 ($4,000 ÷ 5 = $800); ($800 × 2 = $1,600 accrued salaries).

Journalize the annual adjusting entry to be made after it was noted that Company owes $600 for payroll on January 10, 2021, for the payroll period ending December 31, 2020.

Debit Salaries and wages expense 600 Credit Salaries and wages payable 600

Record wages earned and owed for the period but not paid.

Debit Salaries and wages expense XXX Credit Salaries and wages payable XXX

Calculate and journalize the annual adjusting entry to be made to record supplies on hand at year-end of $3,500. Original supplies 5,000

Debit Supplies expense 1,500 Credit Supplies 1,500 5,000 - 3,500

Record supply usage for the period.

Debit Supplies expense XXX Credit Supplies XXX

An analysis of a Global Advertising Agency reveals that adjusting entries for the following were to be prepared as of March 31st of the current year. $1,500 of unearned advertising revenue was earned during the month. What is the journal entry for this adjustment?

Debit Unearned Advertising Revenue 1500 Credit Advertising Revenue 1500

Adjustment of Revenue Services associated with unearned revenue were completed, but were not recorded totaled $4,890. Initial Entry Debit Cash 4890 Credit Unearned Revenue 4890 What is the adjusting entry?

Debit Unearned Revenue 4890 Credit Revenue 4890

Record revenue earned for the period.

Debit Unearned revenue XXX Credit Revenue XXX

_______are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.

Deferrals

Note that the asset's book value generally differs from its fair value. What is the reason for this?

Depreciation is an allocation concept, not a valuation concept. That is, depreciation allocates an asset's cost to the periods in which it is used. Depreciation does not attempt to report the actual change in the value of the asset.

The disposal of a component of a business or the elimination of a component that represents a strategic shift.

Discontinued Operation

A section of the Income statement that shows Material gains or losses resulting from the disposition of a component of the business.

Discontinued Operations

Do not close ___________ through the Income Summary account.

Dividends are not expenses, and they are not a factor in determining net income.

James, Inc. incurred the following infrequent losses during 2020: A $280,000 write-down of equipment leased to others A $160,000 adjustment of accruals on long-term contracts A $240,000 write-off of obsolete inventory In its 2020 income statement, what amount should James report as total unusual losses? $520,000 $440,000 $680,000 $400,000

Each of these items are considered unusual and infrequent. Therefore the amount James will report as total unusual losses is $680,000 ($280,000 + $160,000 + $240,000)

It is often defined as the planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings

Earnings Management

A section of the Income Statement that is a measure of performance over the reporting period

Earnings Per Share

The net income earned by each share of outstanding common stock.

Earnings Per Share

__________is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding

Earnings per share

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

Expenses

_______ are decreases in net assets or incurrence of liabilities from primary business activities.

Expenses

How is an expense best described? -Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners. --Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. ---Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. ----Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.

Expenses are defined as outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

What limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation? -Income numbers are affected by the accounting methods employed. -Companies omit from the income statement items they cannot measure reliably. -Income measurement involves judgment. -The accelerated depreciation method will need to be converted to the straight-line method.

Income numbers are affected by the accounting methods employed. Depreciation is an accounting method. If one company uses accelerated depreciation while another uses straight-line, comparing the income of the statements for the two would be affected.

Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.

Gains

Which component occurs from peripheral or incidental transactions? Gain on the sale of equipment Cost of goods sold Operating expenses Sales revenue

Gains and losses, however, are peripheral or incidental to the major operations of the company.

_________ and _______ are from incidental activities not from the normal or primary operating activities of the business.

Gains or Losses

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. What were net sales last year for Lang Company? $12,350,000 $12,720,000 $12,035,000 $12,175,000

Gross Billings - Returns & Allowances - Discounts = Net Sales ($12,720,000 - $370,000 - $175,000 = $12,175,000). Freight out is a selling expense and not included in the calculation of Net Sales.

The following information was extracted from the 2020 financial statements of Max Company: Income from continuing operations before income tax $705,000 Selling and administrative expenses $480,000 Income from continuing operations $495,000 Gross profit $1,350,000 What is the amount reported for other expenses and losses? $15,000 $165,000 $225,000 $210,000

Gross Profit - Selling Expenses - Other Expenses = Income from Continuing Operations before Tax. ($1,350,000 - $480,000 - X = $705,000) Solve for X = $165,000

The accountant for the Lintz Sales Company is preparing the multiple-step income statement for 2020. Where will the January 1, 2020 merchandise inventory balance appear? -As a deduction of the Sales or Revenue section of the income statement -As an addition of the Sales or Revenue section of the income statement -In the Cost of Goods sold section of the income statement -In the Selling Expenses section of the income statement

In the Cost of Goods sold section of the income statement. The merchandise inventory balance is used to calculate the Cost of Goods. Cost of Goods is not a selling expense.

The statement is also referred to as a statement of earnings, or a statement of profit. You may hear some refer to it as a P & L statement.

Income Statement

In the closing process, Pioneer Advertising transfers all of the revenue and expense account balances (income statement items) to a clearing or suspense account called _____________. This account matches revenues and expenses.

Income Summary

In the closing process, the company transfers all of the revenue and expense account balances (income statement items) to a clearing account called __________, which is used only at the end of the fiscal year.

Income Summary

Pioneer uses this clearing account only at the end of each accounting period. The account represents the net income or net loss for the period. It then transfers this amount (the net income or net loss) to a stockholders' equity account.

Income Summary

A section of the income statement reporting federal and state taxes levied on income from continuing operations.

Income Tax.

To make an adjustment in Unearned Revenues what needs to be debited and credited?

Liability is debited (Decreased) Revenue is credited (Increased)

Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.

Losses

A concept that states that companies record most items, including unusual or infrequent ones, as part of net income

Modified All-inclusive Concept

What are the 2 types of income statements?

Multi Step and Single Step

What is a feature of a multiple-step income statement? -It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. -It eliminates operating versus non-operating transactions. -It separates costs and expenses from revenues. -It combines operating transactions and nonoperating transactions.

Multi-step income statements highlight certain intermediate components of income, such as operating versus non-operating transaction by matching costs and expenses with related revenues.

An income statement that shows numerous steps in determining net income (or net loss), including operating and nonoperating sections.

Multiple-step Income Statement

The portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

Noncontrolling Interest

A section of the Income Statement that shows Allocation of income to noncontrolling shareholders.

Noncontrolling Interest.

A report of revenues and expenses resulting from secondary or auxiliary activities of the company. In addition, special gains and losses that are infrequent or unusual, or both, are normally reported in this section.

Nonoperating Section

A report of the revenues and expenses of the company's principal operations.

Operating Section

Is the expense item selling, administrative, or other? Freight-in

Other Expense

Is the expense item selling, administrative, or other? Income tax expense

Other Expense

Is the expense item selling, administrative, or other? Interest expense on bonds & notes

Other Expense

Is the expense item selling, administrative, or other? Purchase discounts

Other Expense

Is the expense item selling, administrative, or other? Purchases

Other Expense

Is the expense item selling, administrative, or other? Sales returns & allowances

Other Expense

Is the expense item selling, administrative, or other? Supplies

Other Expense

What are the 2 main subsections of the Non Operating Section of the Income Statement?

Other Revenues and Gains. A list of the revenues recognized or gains incurred, generally net of related expenses, from nonoperating transactions. Other Expenses and Losses. A list of the expenses or losses incurred, generally net of any related incomes, from nonoperating transactions.

Is the expense item selling, administrative, or other? Sales Discounts

Other expense

A pizza company sells a delivery truck for a profit. That is not part of their normal operating income so it needs to be put in the Non Operating Income. Why is this important?

Otherwise it might obscure the fact that operations is doing poorly

_________ expire either with the passage of time such as advertising, rent, and insurance or through use and consumption such as supplies.

Prepaid expenses

Expenses paid in cash before they are used or consumed.

Prepaid expenses (Deferrals)

Noncontrolling interest Allocation of net income or loss divided between two classes: (1) the majority interest represented by the shareholders who own the controlling interest, and (2) the noncontrolling interest. Net income (loss) attributable to noncontrolling shareholders. Reported in _______________________

Report as a separate item below net income or loss as an allocation of the net income or loss (not as an item of income or expense).

Earnings per share Must be reported on the face of the income statement. Net income minus preferred dividends divided by weighted-average shares outstanding Reported __________________________

Report separate EPS for income from continuing operations (if applicable) and net income.

Revenues and expenses are matched in the Income Summary account. The net result of this matching represents the net income or net loss for the period. That amount is then transferred to an equity account (____________ for a corporation and ____________ for proprietorships and partnerships).

Retained Earnings, capital accounts

__________ increases in net assets or settlement of liabilities from primary business activites

Revenue (Sales)

Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Revenues

Per the Revenue Recognition Principle and the Expense Recognition Principle Revenues and expenses should be recorded when?

Revenues should be recorded in the period they are earned. Expenses should be reorded in the period they are incurred.

What type of revenue is normally accounted for when it is collected and recorded in advance? Unearned Prepaid Cash Accrued

Revenues that have been paid for, but not earned are classified as unearned revenue.

Jackson, Inc. has the following information available: Cost of goods sold $148,500 Dividend revenue $ 3,750 Income tax expense $ 3,000 Operating expenses $ 79,500 Sales$255,000 In Jackson's multiple-step income statement, what will gross profit be reported as? It will be reported at $106,500. It will be reported at $27,000. It will be reported at $18,500. It will be reported at $24,000.

Sales - Cost of Goods = Gross Profit ($255,000 - $148,500 = $106,500

What are the 4 sections of the Operating Section of the income statement?

Sales or Revenue. A subsection presenting sales, discounts, allowances, returns, and other related information. Its purpose is to arrive at the net amount of sales revenue. Cost of Goods Sold. A subsection that shows the cost of goods that were sold to produce the sales. Selling Expenses. A subsection that lists expenses resulting from the company's efforts to make sales. Administrative or General Expenses. A subsection reporting expenses of general administration.

Is the expense item selling, administrative, or other? Bad debt expense (selling)

Selling Expense

Is the expense item selling, administrative, or other? Depreciation expense (sales equipment)

Selling Expense

Is the expense item selling, administrative, or other? Salaries

Selling Expense

Is the expense item selling, administrative, or other? Sales Commissions

Selling Expense

Is the expense item selling, administrative, or other? Telephone % Internet expense (sales)

Selling Expense

Is the expense item selling, administrative, or other? Travel & entertainment expense (sales personnel)

Selling Expense

___________ are costs associated with selling a product. _____________ are costs incurred in the day-to-day operations of the company.

Selling expenses, Administrative expenses

Discontinued operations Elimination of the results of operations of a component of the business with cash flows that can be clearly distinguished and for which the elimination represents a strategic shift. Sale by diversified company of major division that represents only activities in electronics industry. Food distributor that sells wholesale to supermarket chains and through fast-food restaurants decides to discontinue the division that sells to one of two classes of customers. Reported in _______________________

Show in separate section after continuing operations. (Shown net of tax.) The term net of tax refers to the amount left after adjusting for the effects of taxes.

An income statement that consists of just two groupings: revenues and expenses.

Single-step Income Statement

Which approach does income reporting follow? Current operating performance Modified all-inclusive All-inclusive Modified current operating performance

The accounting profession has adopted the modified all-inclusive concept where companies record most items, including unusual or infrequent ones, as part of net income. In addition, companies are required to highlight these items in the financial statements so that users can better determine the long-run earning power of the company.

What effect does the adjusting entry for accruals have on the balance sheet and the income statement?

The adjusting entry for accruals will increase both a balance sheet and an income statement account.

What can the income statement be used to assess? Classification Creditworthiness Solvency Liquidity

The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness. Creditworthiness is the measure that a company has sufficient income to cover its expenses. Both revenue and expenses are found on the income statement.

A company usually debits insurance premiums to the asset account Prepaid Insurance when paid. At the financial statement date, what occurs next?

The company then debits Insurance Expense (increases) and credits Prepaid Insurance (decreases) for the cost that expired during the period.

What are the major elements of the income statement? -Revenues, cost of goods sold, selling expenses, and general expense -Revenues, operating section, non-operating section, discontinued operations, and extraordinary items -Revenues, expenses, gains, and losses -Revenues, cost of goods sold, operating expenses, non-operating section

The four major elements of an income statement are revenues, expenses, and non-operating gains and losses.

What does the income statement reveal about an organization? -Resources and equities of the organization at a point in time -Net earnings (net income) of the organization for a period of time -Resources and equities of the organization for a period of time -Net earnings (net income) of the organization at a point in time

The income statement reports net earnings (net income) for a period of time, such as month or a year.

What is an advantage of the single-step income statement over the multiple-step income statement? -Expenses are classified by function. -It does not imply that one type of revenue or expense has priority over another. -It matches costs and expenses with related revenues. -It reports gross profit for the year.

The primary advantage of the single-step format lies in its simple presentation and the absence of any implication that one type of revenue or expense item has priority over another.

What approach focuses on the income-related activities that have occurred during the period? Classification Earnings quality Capital maintenance Transaction

The transaction approach focuses on the income-related activities that have occurred during the period.

What will result if a company fails to properly record an adjusting entry to accrue a revenue item? Understatement of revenues and an understatement of assets Overstatement of revenues and an overstatement of assets Understatement of revenues and an understatement of liabilities Overstatement of revenues and an overstatement of liabilities

To accrue a revenue item, the adjusting entry must credit the revenue account (ie: Rental Income) and debit the asset account (ie: Accrued Rent). If this entry is missing, an understatement of revenues and an understatement assets will be present.

___________ is the opposite of prepaid expense. The company converts a liability on the balance sheet that results from receiving cash before a service is provided or a good is delivered. View it as a prepayment for a service or a good that a company is expected to provide to the customer later.

Unearned revenue

Cash received before services are performed.

Unearned revenues (Deferrals)

Companies make adjusting entries for ________ to record revenues for services performed and expenses incurred in the current accounting period.

accruals

Accrued revenue is revenue earned in the current period but not yet collected (received) and recorded. The company debits an ______account and credits a __________ account.

asset , revenue

It does not close the permanent accounts—___________________. Instead, Pioneer draws a single underline beneath the current period entries for the permanent accounts. The account balance is then entered below the single underline and is carried forward to the next period

assets, liabilities, and stockholders' equity (Common Stock and Retained Earnings).

The ___________ is prepared from the asset, liability, and equity accounts.

balance sheet

The ________ of any depreciable asset is the difference between its cost and its related accumulated depreciation.

book value

For a corporation, the stockholders' equity account is retained earnings; for proprietorships and partnerships, it is a ____________.

capital account

The _________ reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions.

closing process

The _________ is the report that measures the success of company operations for a given period of time.

income statement

The __________ is useful because it provides investors and creditors with information that helps them predict the amounts, timing, and uncertainty of future cash flows. Also, it helps users determine the risk (level of uncertainty) of not achieving particular cash flows.

income statement

The ______________ is prepared from the revenue and expense accounts.

income statement

The business and investment community uses the ________ to determine profitability, investment value, and creditworthiness.

income statement

A __________________ shows two further classifications: (1) a separation of operating results from those obtained through the nonoperating activities of the company, and (2) a classification of expenses by functions, such as merchandis-ing or manufacturing, selling, and administration.

multiple-step income statement

If a company holds a ___________ in a subsidiary company, it must present an allocation of net income or loss that is attributable to the noncontrolling interest.

noncontrolling interest

The operating section of the income statement represents the activities that occur in a company's ordinary operations. The ________________ represents the activities that occur outside of a company's day-to-day operations.

nonoperating section

The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments. Because the accounts contain all data needed for financial statements, the adjusted trial balance is the ?

primary basis for the preparation of financial statements.

The __________ is prepared from the retained earnings account, dividends, and net income (or net loss).

retained earnings statement

Closing Entries 1.Close revenue accounts to Income Summary 2.Close expense accounts to Income Summary 3.Close Income Summary to _____________ 4.Close dividends to _____________

retained earnings, retained earnings

We are using accrual accounting. Revenue is recorded when earned - regardless of when cash is received.

revenue recognition principle

As part of the closing process, Pioneer totals, balances, and double-underlines the temporary accounts—___________, ____________, and ____________.

revenues, expenses, and dividends

The major elements of the income statement are?

revenues, expenses, gains, and losses

The _________________ focuses on the activities that occurred during a given period. Instead of presenting only a net change in net assets, it discloses the components of the change. This approach to income measurement requires the use of revenue, expense, loss, and gain accounts.

transaction approach

This method of income measurement, the __________, focuses on the income-related activities that have occurred during the period.

transaction approach

Companies estimate ___________ at the end of each period. This ensures that receivables are reported on the balance sheet at their net realizable value. As a result, proper valuation of the receivable balance requires recognition of uncollectible receivables and an adjusting entry for bad debt expense.

uncollectible accounts

Rent, magazine subscriptions, and customer deposits are examples of _______________.

unearned revenue

As the unearned revenue becomes earned over time, it will be reported in the income statement by debiting the ____________ account and crediting a __________ account.

unearned revenue liability, revenue

When companies receive cash before services are performed, they record a liability by increasing (crediting) a liability account called ____________.

unearned revenues