3.2 - The Income Statement

Question 1

Features

Answer 1

The HEADING gives:
-Name of business
-Name of Statement (Income Statement)
-Accounting period for which the figures have been accumulated

REVENUE section: shows an increase in equity resulting from the proceeds of the sale of goods or services in the ordinary course of business

EXPENSES section: shows decreases in equity resulting from the cost of the goods or services used to produce the revenue

The NET INCOME or NET LOSS figure. It is the difference between total revenues and total expenses

Question 2

Use of income statement for managers

Answer 2

• Tells if a PROFIT is being earned
• Helpful in forming company goals, policies and making company decisions
• By comparing income statements you can determine trends and patterns, both favorable and unfavorable

Question 3

Use of income statement for bankers

Answer 3

Will the borrower be able to repay the loan?

Question 4

Use of income statement for income tax authorities:

Answer 4

The income statement and owner’s income tax return must be sent to the government each year

Question 5

The Fiscal Period

Answer 5

is the period of time over which earnings are measured

The formal fiscal period is normally one year, but half-yearly, quarterly or monthly fiscal periods are used by some businesses

Question 6

TIME PERIOD ASSUMPTION (GAAP)

Answer 6

provides that accounting will take place over specific TIME periods known as fiscal periods

These fiscal periods are of equal length and are used when measuring the financial progress of a business

Question 7

MATCHING PRINCIPLE (GAAP)

Answer 7

requires expenses to be recorded and matched with revenue they help to generate during the same accounting period

If this is not done, the financial statements will not measure the PROFITABILITY of the operation fairly

Question 8

REVENUE RECOGNITION PRINCIPLE (GAAP)

Answer 8

states that revenue is recognized when revenue is definitely earned.

ex: When the service is performed or when goods are shipped to a customer.
Even if CASH has not been RECEIVED!

Question 9

The Chart of Accounts

Answer 9

is a list of the ledger accounts and their numbers arranged in ledger order

These numbers are used for identification

ASSETS 100-199
LIABILITIES 200-299
CAPITAL / DRAWINGS 300-399
REVENUES 400-499
EXPENSES 500-599