Chapter 4 Flashcards
Differentiate between service businesses and merchandising businesses.
Merchandising businesses generate revenue by selling goods and service businesses are what they sound like, they provide a service.
___________ businesses sell their goods to other businesses, while __________ businesses sell goods to the final consumer.
wholesale
retail
When do retailers recognize revenue?
When they sell their products
Inventory is _________, which means businesses constantly buy and sell and it changes throughout the year.
cyclical
How is the inventory relayed on the income statement and balance sheet?
Products sold during the period is on the income statement and is called cost of goods sold.
Ending inventory (an asset) is on the balance sheet.
What are costs of goods sold?
The price the selling company paid for the products that were sold during the period.
Give the equation for cost of goods available.
Beginning inventory balance + inventory purchased during the period = cost of goods available
________ inventory systems are more accurate than a _________ inventory system.
perpetual
periodic
What is a perpetual inventory system?
Inventory account is updated continually throughout the accounting period.
What is a periodic inventory system?
Updates inventory balance only at the end of the accounting period.
What is the term for lost or stolen inventory?
shrinkage
How can companies determine an amount of shrinkage?
By performing a physical count of their inventory on hand and comparing it to the amount of inventory balance in the accounting records.
What is the difference between revenue and costs of goods sold?
Costs of goods sold is the amount that the retailer purchased their inventory for. Revenue is the amount of money that they made off of the sale of their inventory.
They are both reported on the income statement.
______ _________ demonstrates a business’s ability to sell its products at a price higher than they paid for them.
gross profit
How is operating income calculated?
Operating expenses - gross profit (gross margin) = operating income
_________ _________ represents a business’s profitability from its core business operations.
operating income
What are 4 nonoperating or peripheral activities that show up on the income statement?
+ Interest revenue
- Interest expense
+ Gains
- Losses
What is the name for the expense that represents the portion of a business’s profit that is paid to the gov’t?
income tax expense
If a company sells land for more than its cost, the difference in sales price and cost is called a ______.
gain
What’s the difference between revenue and a gain?
A gain happens when you earn money from something outside of what you got into business to do. However, they both increase net income.
Gain is a _________ _____ account.
stockholder’s equity
What items indicate that the business activity are not part of their normal scope of business?
nonoperating activities
How is gross profit (gross margin) calculated?
Revenue - cost of goods sold = gross margin
How is operating income calculated?
gross margin - operating expenses = operating income
What is the name of the expense that is reported when inventory is sold?
cost of goods sold
Briefly describe the multi-step income statement.
Revenue
- COGS
= Gross Profit
- Operating Expenses
= Operating Income
+/- Nonoperating Expenses (Gains, losses, interest rev, interest exp)
- Income Tax Expense
= Net Income
