Ch. 1.2 Flashcards
Structure of the heading for an income statement:
name of the entity: Le-Nature’s Inc.
Title of the statement: Income Statement
Unit of measure: (in millions of dollars)
Specific period of time: for the year ended December 31, 2015
*unlike the balance sheet, however, which reports as of a certain date.
The time period covered by the financial statements (one year in this case) is called an…
Accounting Period
The income statement equation is…
Revenue - Expenses = Met Income
Define Revenues.
Cash and promises received from delivery of goods and services.
Define Expenses
Resources used to earn period’s revenues.
Define Net Income
Revenues earned minus expenses incurred.
Companies earn ————- from the sales of goods or services to customers ( in Le Nature’s case, from the sale of beverages).
Revenues
———— Normally are amounts expected to be received for goods or services that have been delivered to a customer, whether or not the customer has paid for the goods or services.
Revenues
Retail stores such as Walmart and McDonald’s often receive cash from consumers at the time of sale. However, when Le-Nature’s delivers its beverages to retail stores, it receives a promise of future payment called an ——— ———, which later is collected in cash.
Accounts Receivable
A promise of future payment which is later collected in cash is called an
Accounts Receivable
Various terms are used in income statements to describe different sources of revenue such as…
- sales revenue
- provision of services
- sale of goods
- rental of property
———— Represents the dollar amount of resources the entity used to earn revenue used during the period.
Expenses
Can expenses reported in one accounting. Actually be paid for in another accounting period?
Yes. Some expenses require the payment of cash immediately, while others require payment at a later date. Some also may require the use of another resource, such as an inventory item, which may have been paid for in a prior period.
General notes: One of the expenses on Le Nature’s income statement includes income tax expense…
Which, as a corporation, Le-Nature’s must pay on the subtotal income before income taxes.
Net income is also known as…
Net earnings
often called “the bottom line”
Define net income
The excess of total revenues over total expenses
Define net loss
When total expenses exceed total revenues.
We noted earlier that revenues are not necessarily the same as collections from customers and expenses are not necessarily the same as payment to suppliers. As a result, net income normally ——- —— —— the net cash generated by operations.
Does not equal
The net cash generated by operations is reported on the —- —— ——-.
Cash flow statement
Financial analysis: define net income
A business’s ability to sell goods and services for more than they cost to produce and deliver.
Financial analysis: Investors and creditors such as Wells Fargo bank closely monitor a firm’s—— —— because it indicates the firms ability to sell goods and services for more than they cost to produce and deliver. Investors —- —- when they believe that future earnings will improve and lead to dividends and the ability to sell their stock —- —- —- — —. Lenders also rely on future earnings to provide the resources to —- —.
Net income
Buy stock
For more than they paid
Repay loans
General notes: Financial analysis: the details of the income statement are also important. For example, Le-Nature’s had to sell more than $275 million worth of beverages to make just under $23 million. If a competitor were to lower prices just 10%, forcing Le Nature’s to do the same, its net income could easily turn into a net loss.
These factors and others help investors and creditors estimate the company’s future earnings.
Define income statement
A statement of operations that reports revenues, expenses, and net income for a stated period of time.
Quiz: Mark each income statement item in the following list as a revenue or an expense:
Cost of goods sold
Expense
Quiz: Mark each income statement item in the following list as a revenue or an expense:
Income tax
Expense
Quiz: Mark each income statement item in the following list as a revenue or an expense:
Sales revenue
Revenue
Quiz: Mark each income statement item in the following list as a revenue or an expense:
Selling, general, and administrative
Expense
Quiz: assume that during the period 2015, Le Nature’s delivered beverages for which customers paid or promised to pay amounts totaling $275.1 million. During the same period, it collected $250 million in cash from its customers. Indicate which of these two amounts will be shown on Le Nature’s Income statement as sales revenue for 2015. Why did you select your answer?
Sales revenue in the amount of $275.1 million is recognized. Sales revenue is normally reported on the income statement when goods or services have been delivered to customers who have either paid or promised to pay for them in the future.
Quiz: assume that during the period 2015,  Le Nature’s produced beverages with the total cost of production of $142.1 million. During the same period, it delivered to customers beverages that cost a total of $140.8 million to produce. Indicate which of the two numbers will be shown on Le Nature’s Income statement as cost of goods sold expense for 2015. Why did you select your answer?
Cost of goods sold expense is $140.8 million. Expenses are the dollar amount of resources used up to earn revenues during the period. Only those beverages that have been delivered to customers have been used up.
Structure of heading for statement of stockholders equity:
Name of entity: Le-Nature’s Inc.
Title of the report: Statement of Stockholders’ Equity
Unit of measure: (in millions of dollars)
Accounting period: For the year ended December 31, 2015
- like the income statement, the statement of stockholders’ equity covers a specific period of time (the accounting period) which in this case is one year.
