Chapter 5

Question 1

income statement

Answer 1

a formal financial statment that indicates a business’ revenue and expenses; shows the overall profit/loss of a business over a period of time

Question 2

revenue

Answer 2

money made on sale of services/merchandise

Question 3

expenses

Answer 3

cost of operating a business

Question 4

net income

(aka profit)

Answer 4

revenue - expenses

Question 5

net loss

Answer 5

revenue (<) - expenses

Question 6

drawings

Answer 6

withdrawals from the business for personal use

Question 7

Revenue Recognition

GAAPs/IFRS

Answer 7

• revenue will be recorded in the period it was EARNED, not when payment is received
• revenue is recorded when the transcation is completed
• payment could be made immediately from a customer or come later from an A/R

Question 8

Time Period Concept

GAAPs/IFRS

Answer 8

• accounting records are completed over equal periods of time, called fiscal periods
• this allows business to accurately measure financial progress and see trends over previous timeframes
• typically 12 months

Question 9

Matching Principle

GAAPs/IFRS

Answer 9

• states expenses are recorded in the same fiscal period as the revenue they helped earn
• moving expenses to other fiscal years will skew the income statement and mislead business owners, investors, shareholders and banks
• an expense not included in the fiscal year makes the net income look higher, and therefore more appealing for a bank to lend the business money

Question 10

owner’s equity formula

Answer 10

BC + R - E - D = EC

ending capital for year 1 becomes beginning capital for year 2