Chapter 4 - The Income Statement And The Cash Flow Statement Flashcards
- Identify revenue and expenses for a period and draw up a simple income statement. - Understand the principles of accrual accounting where revenue and expenses are allocated to the periods to which the economic activities relate rather than simply when the transaction occurred. - Understand the definitions of revenue and expenses, the difficulties associated with the recognition of revenue and the importance of the matching principle. - Understand how a cash flow statement is produced and th
Definition: Income statement/profit and loss account
- The income statement relates to a period in time.
- It summarizes certain transactions taking place over that period (normally 1 year)
- Its purpose is to measure profit
- It does this by summarizing the revenue for that period and deducting from that the expenses incurred in earning that revenue.
revenue - expenses = profit
Key Concept: Revenue
Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of the entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Key Concept: Revenue (IFRS-SME)
Revenue is income that arises in the course of the ordinary activities of an entity and is referred to by a variety of names including sales, fees, interest, dividends, royalties and rent.
Key Concept: Gains (IFRS-SME)
Gains are other items that meet the definition of income but are not revenue. When gains are recognized in the statement of comprehensive income, they are usually displayed separately because knowledge of them is useful for making economic decisions.
Key Concept: The realization principle
The realization principle states that revenue should only be recognized
(a) when the earnings process is substantially complete and
(b) when the receipt of payment for the goods and services is reasonably certain.
Key Concept: The matching principle
We must match the revenue earned during a period with the expenses incurred in earning that revenue.
Key Concept: An expense
An expense is an expired cost, i.e. a cost from which all benefit has been extracted during an accounting period.
