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