Chapter 10: Reporting for a service business

Question 1

Revenue

Answer 1

An inflow of economic benefits in the form of an icnrease in assets or decrease in liabilities that increases Owner’s Equity (except for Capital Contributions)

Question 2

Expense

Answer 2

An outflow or consumption of economic benefits, in the form of a decrease in assets or increase in liabilities, that decreases Owner’s Equity (except for drawings)

Question 3

The income statement

Answer 3

an Accounting report that
details the revenue earned and
expenses incurred during the
reporting period

Question 4

Strategies to increase revenue

Answer 4

-Decrease Prices
-Employ effective marketing
-Improve their service (customer satisfaction, word of mouth)

Question 5

Uses of the income statement

Answer 5

1. To aid a firm’s decision making
2. assess whether the business is meeting its revenue and expense targets by
   comparing the Income Statement against budgeted (or expected) performance

Question 6

Strategies to decrease expenses

Answer 6

-Change Supplier

-Buy in bulk

Question 7

Vertical analysis of the income statement

Answer 7

a representation of individual expenses as a percentage
of revenue to allow for an
assessment of their relative
importance

Question 8

Profitability

Answer 8

the ability of a business to earn profit as expressed in relative terms by comparing profit against a base like sales, assets or owner’s equity

Question 9

Net profit margin (NPM)

Answer 9

a profitability indicator that assesses expense control by calculating the percentage of Sales revenue that is retained as Net Profit

Question 10

Formula for calculating Net profit margin

Answer 10

Net profit / revenue x 100

Question 11

Why is the Income Statement titled for a particuar period rather than as at a particular date

Answer 11

The income statement reports transactions that have occurred not just on the one day, but over a period of time.

Question 12

Reasons for earning a Net Profit but suffering a net decrease in cash position

Answer 12

-Cash Drawings
-Loan repayment
-Cash purchase of a Non current asset
-Gst Settlement

Question 13

Reasons for net increase in cash position despite incurring a Net loss

Answer 13

-Receipt of a loan
-Capital contribution from the owner
-GST refund

Question 14

Explain how materials purchased and cost of materials used can lead to

More cash than Profit

Answer 14

If the Cost of materials used is greater than materials purchased and payments to Accounts Payable, would support why the business has more cash than profit.

Question 15

Explain how materials purchase and cost of materials used can lead to

Less Cash than Profit

Answer 15

If Cash purchases of materials and Payments to Accounts Payable is greater than the Cost of materials used for a particular reporting period, it will lead to a Net profit but a decrease in operating flows, and therefore a net decrease in cash position

Question 16

Explain how Credit Fees and Receipts from Accounts Receivable can lead to:

More cash than profit

Answer 16

If receipts from accounts receivable is greater than Credit fees, this will lead to more cash than profit, as receipts from Accounts Receivable do not lead to a change in Owner’s Equity

Question 17

Explain how Credit Fees and Receipts form Accounts Receivable can lead to

Less cash than profit

Answer 17

If credit fees are greater than receipts from accounts receivable, the business could have less cash than profit

Question 18

Explain how GST received from customers and paid to suppliers can lead to:

More cash than Profit

Answer 18

If GST received from customers is greater than GST paid to suppliers, Bank will icnrease, leading to more cash than profit

Question 19

Explain how GST received from customers and paid to suppliers can lead to:

Less cash than profit

Answer 19

If GST paid to suppliers is greater than GST received from customers, Bank will decrease, leading to less cash than profit

Question 20

Explain the relationship between the Income statement and the Balance sheet

Answer 20

Net profit in the income statement represents an increase or decrease in owner’s equity as a result of business operations, which must be reported in the Owner’s Equity section of the balance sheet

Question 21

Explain why a Capital Contribution is excluded by the definition of revenue

Answer 21

While capital contribution is an increase in assets (cash at bank) that increases Owner’s Equity, it is not earned by the business and is therefore not recognised as revenue