Chapter 3

Question 1

How do you calculate the net profit margin ratio?

Answer 1

Net Profit Margin Ratio = Net Income [or Net Loss] ÷ Net Sales [or Operating Revenues]

Question 2

What does the net profit margin measure?

Answer 2

Measures the profit generated per dollars of sale.
A high ratio (compared to their competitors) suggests a company generates a revenue or is controlling their expenses.

Question 3

How do business activities affect the income statement?

Answer 3

The Operating (Cash-to-Cash) Cycle – the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers.
Time period - how often do you need to do the income statement

Question 4

What are the elements of an income statement?

Answer 4

Revenues, expenses, gains and losses

Question 5

What are revenues?

Answer 5

An increase in assets/settlements of liabilities from the major ongoing operations

Question 6

What are expenses?

Answer 6

A decreases in assets/increases in liabilities from ongoing operations incurred to generate revenues

Question 7

What are gains?

Answer 7

An increase in assets/settlements of
liabilities from peripheral transactions

Question 8

What are losses?

Answer 8

A decrease in assets/increases in liabilities from peripheral transactions

Question 9

What are operating revenues?

Answer 9

Earnings from the central focus of the business

Question 10

What are operating expenses?

Answer 10

Costs of operating the business that are incurred to generate revenues during the period

Question 11

What is the different between an expenditure and an expense?

Answer 11

An expense is when cash is taken out of my pocket and cash is immediately taken away
An expenditure is an outflow of cash

Question 12

What is the income statement format?

Answer 12

Operating revenues
Less operating expenses
Income from operations
Add/less: other items
Income before income tax
Income tax expense
Net income

Question 13

How to calculate earnings per share?

Answer 13

Net income/weighted average number of shares of common stock outstanding

Question 14

What is cash basis accounting?

Answer 14

Determines performance

Question 15

What happens if cash is received before the company delivers goods?

Answer 15

The liability account UNEARNED REVENUE is recorded

Question 16

What happens if cash is received after the company delivers the goods?

Answer 16

An asset ACCOUNTS RECEIVABLES is recorded

Question 17

What is the accrual basis of accounting?

Answer 17

Revenues and expenses re recognized when the transaction that causes them occurs, not necessarily when the cash is paid/received

Question 18

When are revenues recognized in accrual accounting?

Answer 18

When goods and services are provided to customers

Question 19

When are expenses recognized in accrual accounting?

Answer 19

In the same period as the revenues to which they relate, regardless of when cash is received/paid

Question 20

What is the revenue recognition principle?

Answer 20

Specifies the timing and amount of revenue to be recognized during an accounting period

Question 21

What is the expense recognition principle?

Answer 21

It requires that costs incurred to generate revenues be recognized in the same period. Expenses are recorded as incurred, regardless of when cash is paid

Question 22

What does a rising net profit margin show?

Answer 22

Signals more efficient management of sales and expenses