1.3 Income Statement and Statement of Comprehensive Income

Question 1

Income equation

Answer 1

Income (loss) = revenues + gains - expenses - losses

Question 2

Limitations of income statement

Answer 2

• Items of income and expense may be omitted from the income statement and reported on the statement of other comprehensive income
• Financial statements report accrual-basis results for the period
• Preparing the income statement requires estimates and management judgement

Question 3

Which one of the following would be shown on a multiple-step income statement but not on a single-step income statement?

A. Gross Profit
B. Loss from discontinued operations
C. Cost of goods sold
D. Net income from continuing operations

Answer 3

A. Gross profit

A single-step income statement combines all revenues and gains, combines all expenses and losses, and subtracts the latter from the former in a “single step” to arrive at net income. Gross profit, being the difference between sales revenue and cost of goods sold, does not appear on a single-step income statement.

Question 4

Equation to calculate COGS, for retailer

Answer 4

Beginning inventory + Net purchases + Freight-in = Goods available for sales

Goods available for sale - Ending inventory = COGS

Question 5

Equation to calculate COGM

Answer 5

Beginning direct materials inventory + purchase during the period - ending direct materials inventory = direct materials used in production

Direct materials used in production + direct labor costs + manufacturing overhead costs = total manufacturing costs

Total manufacturing costs + beginning WIP inventory - ending WIP inventory = COGM

Question 6

Equation to calculate COGS, with COGM

Answer 6

COGM + Beginning finished goods inventory - ending finished goods inventory = COGS

Question 7

COGS is recognized at the time of goods are sold, which follows the

Answer 7

matching principle

Question 8

Gross profit margin equation

Answer 8

Gross profit / sales

Question 9

The ________ income statement provides one grouping for revenue items and one for expense items

Answer 9

Single-step income statement

Question 10

The ________ income statement presents operating revenues and expenses in a section separate from nonoperating items

Answer 10

multiple-step income statement

Question 11

When an entity reports a discontinued operation, it must be presented in a separate section between

Answer 11

income from continuing operations and net income