Chapter 8 - Income Statement

Question 1

Expenses

Answer 1

An outflow or consumption of an economic benefit (or reduction in an inflow) in the form of a decrease in assets (or increase in liabilities) that reduces owner’s equity (except for Drawings)

Question 2

Income Statement

Answer 2

An accounting report which details the revenues earned and expenses incurred during the reporting period

Question 3

Revenue

Answer 3

An inflow of an economic benefit (or saving in an outflow) in the form of an increase in assets (or decrease in liabilities) that increases owner’s equity (except for capital contributions)

Question 4

Purpose of income statement

Answer 4

To determine the financial performance of a business over a period of time

Question 5

Purpose of statement of receipts and payments

Answer 5

1. To provide cash flow information for a period

2. To provide a cash position as at a point in time

Question 6

Purpose of balance sheet

Answer 6

To provide the financial position of a business as at a point in time

Question 7

Profit and how to calculate it

Answer 7

Profit is the net increase in the owners equity as a result of the firms operations
Profit = revenue - expenses

Question 8

Explain how the profit figure can vary between income statements and a statement of receipts and payments

Answer 8

Profit is determined by revenue minus expenses. However cash surplus (deficit) is determined by cash receipts - cash payments. Not all cash receipts are revenue (e.g capital contribution, loans and GST received) and not all cash payments are expenses (e.g. Drawings, equipment, GST settlement)

Question 9

What are the key elements of the owners equity section of the balance sheet? How do you calculate it?

Answer 9

Owners equity = starting capital + profit + cap. Contribution - drawings = End capital.

Question 10

Explain 3 uses of the income statement

Answer 10

1. aid decision-making about the firm’s operations
2. assess whether the business is meeting its revenue and expense targets
3. assist in planning for future service activities
4. assess the performance of management

Question 11

Cash receipts but not revenues

Answer 11

• a loan
• capital contribution from the owner
• a GST refund

Question 12

Cash payments but not expenses

Answer 12

• drawings
• loan repayment
• purchase of non-current asset
• GST settlement