4a: Income statements Flashcards
What are the four main components that form the final accounts?
- The Income Statement (P&L)
- The Balance Sheet
- The Cash Flow Statement
- The Auditor’s Report
What is the purpose of the Income Statement?
To accurately represent the financial performance of the business over the previous period.
What is the matching concept?
Expenses should be matched to the revenue that they have generated in order to arrive at the profit for the year
What are trade payables?
Amounts owed to suppliers of the business who have supplied goods or services on credit, have not yet been paid by the business
What is a trade receivable?
amounts owed by customers to the business who, having been sold goods or services on credit, have not yet been paid the business
What’s an asset?
Items controlled/owned by the business
What are liabilities?
Amount owed by the business
What is capital income?
Amount of money the owner puts into the business
What is revenuee income?
Income from sales
What is capital income?
Money invested by the owner of the business and loans from third parties
What is IAS 38?
IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance. Examples include patents, copyrights, trademarks, and research and development (R&D) costs.
What characterizes research costs according to IAS 38?
Research costs are always treated as an expense.
Under IAS 38, when can development costs be treated as an asset?
If certain criteria are met:
1. The project is clearly identified.
2. It is technically feasible/commercially viable.
3. Expenditure is separately identifiable.
4. Revenues will exceed costs.
5. Adequate resources are available.
What is the significance of retained earnings in an income statement?
Retained earnings reflect the cumulative amount of profits that have been reinvested in the business rather than distributed as dividends.
What does the accruals (matching) concept imply regarding unsold inventory?
The cost of unsold inventory should be deducted from the profits of the following year, aligning expenses with revenues.
How does capital expenditure differ from revenue expenditure?
Capital expenditure involves investing in long-term assets (like R&D), while revenue expenditure refers to short-term expenses.
What are some examples of intangible assets?
Examples include patents, copyrights, trademarks, goodwill, and customer lists.
How do accruals affect financial reporting?
The accruals concept ensures that revenues and expenses are recorded in the period they occur, regardless of when cash transactions happen, leading to more accurate financial statements.
Why is it essential for firms to distinguish between capital and revenue expenditures?
This distinction affects profit measurement, tax obligations, and investment decisions, influencing the financial position and performance reporting of the firm.
