Accounting Made Simple 03 Flashcards
- A company’s INCOME STATEMENT shows:
the company’s financial performance over a period of time (usually a year). This is in contrast to the Balance Sheet, which shows financial position at a POINT IN TIME.
- What is GROSS PROFIT?
The sum of a company’s revenues, MINUS COST OF GOODS SOLD.
- What is COST OF GOOD SOLD?
Cost of Goods Sold is the amount that the company paid for the goods that it sold over the course of the period.
- EXAMPLE: Laura sells t shirts with logos. On March 1 she ordered 100 shirts for $12 each. On March 31, she had sold all for a total of $2,500. Her COGS is:
Her COGS is $1,200, and her GROSS PROFIT is $1,300.
- EXAMPLE: Rich prepares tax returns. All of his costs are overhead (each of the returns he prepares adds nothing to his total cost). His COGS is:
NOTHING. His GROSS PROFIT is simply equal to his REVENUES.
- Sometimes an Income Statement separates OPERATING REVENUES AND EXPENSES from NON OPERATING REVENUES AND EXPENSES. What are OPERATING REVENUES?
OPERATING REVENUES are those coming from the sale of the business’s PRIMARY PRODUCTS OR SERVICES.
- What are OPERATING EXPENSES?
OPERATING EXPENSES are the expenses related to the core operation of the business, such as rent, insurance premiums, employee’s wages, etc.
- What are NON OPERATING REVENUES and EXPENSES?
They are those expenses that are unrelated to the core operations of the business, such as INTEREST INCOME, INTEREST EXPENSE, and GAINS OR LOSSES ON INVESTMENTS.
- What is the point of separating OPERATING REVENUES AND EXPENSES from NON OPERATING REVENUES AND EXPENSES?
To allow for the calculation of OPERATING INCOME, since it provides a more meaningful number than NET INCOME, as it provides a measure of how well the company is doing at its core business, without including the effects of financing and investment decisions.
