Chapter 3 Reading Notes Flashcards
what is the primary purpose of businesses?
generating wealth (profit)
gross profit = ?
the amount remaining after the cost of sales has been deducted from trading revenue
operating profit = ?
the profit achieved during a period after all operating expenses have been deducted from revenues from operations
what are operating expenses also known as?
overheads
profit for the period = ?
the result when all expenses have been deducted for the period (including interest, taxes, depreciation & amortisation)
cost of sales = cost of goods sold
true or false?
true
how do you calculate cost of sales on an income statement?
opening inventories + purchases - closing inventories
what is the layout of an income statement?
cost of sales
=
gross profit
-
operating expenses
=
operating profit
-
non-operating expenses (e.g., interest)
+
non-operating income (e.g., interest)
=
profit for the period
what convention is used for recognising expenses?
the matching convention
what is the matching convention?
revenue and expenses should match the period in which they were earned/incurred
what is an accrued expense?
an expense that is outstanding at the end of the period
what is the materiality convention?
where amounts involved are immaterial, only what is convenient should be considered
what are prepaid expenses?
an expense that has been paid in advance
what is the accruals convention?
recognising cash when earned and expenses when incurred
what does GDP stand for?
gross domestic product
what is it called when a tangible/intangible asset loses its value during a reporting period?
tangible - depreciation
intangible - amortisation
what 4 factors must be considered when calculation depreciation expense?
the cost
the useful life
the residual value
the depreciation method
what’s included in an asset cost?
the acquisition cost, delivery costs, installation costs & legal costs
what is the straight line method of depreciation?
allocates money to be depreciated evenly over its useful life
carrying amount = ?
the value of an asset after deducting its depreciation/amortisation expenses
same as written down value (WDV) or net book value (NBV)
are all non-current assets subjected to an impairment test?
yes
what are the 3 methods of costing inventory?
fifo, lifo, avco
what is the consistency convention?
when a particular method of accounting is selected, it must continue to be applied consistently over time
what is bad debt?
an amount owed to the business that is considered to be irrecoverable
allowance for doubtful trade receivables = ?
an amount set out aside of profit to prepare for anticipated bad debt
what are the 2 main uses for the income statement?
seeing how much wealth the business generated
how profit was derived
