Chapter 2 - Understanding Financial Statements Flashcards
What is the structure and organization of the income statement?
sales revenue
cost of sales
operating expenses
What is the structure and organization of the balance sheet
Left-hand side consists of all assets which equal all liabilities + SE on the other side (or underneath).
What is the income statement equation?
Revenue - Cost of Goods Sold = Gross Margin - Operating Expenses = Operating income + other income - other expenses = Earnings Before Interest and Tax (EBIT) - interest expense = taxable income - tax = net income.
What is the balance sheet equation?
Assets = Liabilities + Stockholder’s Equity
What are the differences between the balance sheet and income statement
Balance sheet: presents financial status at a point in time, includes assets, liabilities and SE, and presentations of different operations are similar.
Income statement describes operative activities over a period of time, includes revenue, expenses and incomes and presentations differ to reflect operating results
What are the connections between the balance sheet and income statement
sales revenue is considered an inflow of assets
consumed assets become cost of sales and operating expense.
Retained earnings is a critical link.
What is the difference between COGS and Operating Expense
COGS: the cost of inventories that were sold
Expense: other costs of doing business such as depreciation.
What are the (4) limitations of the balance sheet
It does not reflect the current value of some assets.
It doesn’t show good will or human resources which are valuable to hospitality industry.
It is not exact.
It shows financial status for a point in time.
What are other income and expenses?
not directly related to the primary purpose of the business.
located after operating income and before interest expense and taxes.
What is the difference between contributory income and operating income?
Contributory income: the income of an individual operating department after direct expenses have been deducted from sales revenue
Operating income: same as EBIT. interest and tax have not been deducted yet.
What are the (2) purposes of inventory control?
Prevent inventory shortage and excess inventory
What is the Cost of Sales equation?
Beginning Inventory + Purchases = Goods Available
Goods Available - Ending Inventory = Cost of Sales
What is the difference between periodic and perpetual inventory control methods?
periodic: weekly physical count, cost estimated monthly, mainly for low cost items. inventory for a particular day is unknown
Perpetual: continuously updated, maintained for expensive items, requires a number of records, a running balance: Specific Identification Method.
What is the weighted average equation?
total cost of units / total units available
Compare the cost of sales of the three inventory control methods
FIFO: Low cost of sales
LIFO: High cost of sales
Weighted Average Cost: generally reduces effects of price-cost increases or decreases
