Financial Accounting- Income Statement and Balance Sheet

Question 1

What are the main components of the income statement?

Answer 1

Revenue/Sales; Cost of Sales/ COGS; Gross Profit; Other Income; Expenses; Net Income

Question 2

Define Revenue?

Answer 2

• Revenue is an increase in net assets earned by a firm providing goods or services

Question 3

What are the rules of revenue recognition?

Answer 3

-It is earned
-It is realised

Question 4

What are the rules of expense recognition?

Answer 4

• Related revenues are recognised
  -Incurred if difficult to match with revenues

Question 5

What is the basic structure of an income statement?

Answer 5

Revenues
COGS
Gross Margin

General Administrative Expenses
Distribution Expenses
Other Operating Expenses
Operating Income
Finance Expenses/ Income
Other Income

Income Before Tax
Taxes
Net Income

Question 6

What is deferred revenue?

Answer 6

This is when payment has been made but the goods and services have not been delivered yet

Question 7

What is the basic structure of the balance sheet?

Answer 7

Current Assets
Non-Current Assets
Total assets

Current Liabilities
Non-Current Liabilities
Total Liabilities

Equity
Total Liabilities and Equity

Question 8

What is an asset?

Answer 8

An asset is a resource that is expected to provide future economic benefits

Question 9

When is an asset recognised?

Answer 9

• It is acquired in a past transaction or exchange
  -The value of its future benefits can be measured with a reasonable degree of precision

Question 10

What is a liability?

Answer 10

A liability is an obligation to make a future payment of cash

Question 11

When is a liability recognised?

Answer 11

-The obligation is based on benefits or services received currently or in the past
-The amount and timing of payment is reasonably certain

Question 12

What is a contingent liability?

Answer 12

-A liability that will only materialise in a specific scenario (e.g. lawsuit)

Question 13

What is a provision?

Answer 13

This is when a contingent scenario is fairly certain and a contingent liability is likely to be recognised

Question 14

What is stockholder’s equity?

Answer 14

-The residual claim on assets after settling creditor claims
-Assets - Liabilities

Question 15

What is retained income?

Answer 15

Net income- dividends

Question 16

What is retained earnings?

Answer 16

Retained earnings are accumulated earnings over the life of the firm
- Increased by profits
-Reduced by losses
-Reduced by dividend declared to shareholders

Question 17

What order are assets listed in the balance sheet?

Answer 17

From most liquid to least liquid

Question 18

What order are liabilities listed in the balance sheet?

Answer 18

Those the firm will discharge soonest (most current) to those the firm will pay latest (most non-current)

Question 19

What are the different equations for shareholder’s equity?

Answer 19

-Shareholder’s equity= Contributed Capital + Retained Earnings
-Shareholder’s equity= Contributed Capital + Retained Earnings + Net Income- Dividends
-Shareholder’s equity= Contributed Capital + Retained Earnings Beginning of Period + Revenue for Period- Expenses for Period - Dividends for Period

Question 20

What is the Accounting Equation?

Answer 20

-Assets= Liabilities + Shareholders’ Equity
- Stockholder’s Equity= Capital + Retained Earnings
-Retained Earnings= Prior Retained Earnings + Net Income - Dividends
-Net Income= Revenues - Expenses
- Assets = Liabilities + Capital + Prior Retained Earnings + Revenues- Expenses - Dividends

Question 21

What is the equation for Retained Earnings at the end of a period?

Answer 21

Retained Earnings= Retained Earnings from last Year + Net Income - Dividends

Question 22

What are the 3 fundamental equations of double entry bookkeeping?

Answer 22

1. Assets= Liabilities + Stockholder’s Equity
2. Sum of Debits = Sum of Credits
3. Beginning account balance + Increases - Decreases = Ending Account Balance

Question 23

What are the debit accounts?

Answer 23

• Assets
  -Expenses

Question 24

What are the credit accounts?

Answer 24

-Liabilities
-Capital
-Prior Retained Earnings
-Revenues

Question 25

What does a debit do to a debit and credit account respectively?

Answer 25

-Increases a debit account
-Decreases a credit account

Question 26

What does a credit do to a debit and credit account respectively?

Answer 26

-Decreases a debit account
-Increases a credit account

Question 27

What are the stages of the Accounting Cycle?

Answer 27

1. Journalise and post transactions in t-accounts
2. Prepare an unadjusted trial balance
   
   • Verify if sum debits= sum credits
3. Record the adjusting entries
4. Record closing entries
   
   • Close temporary accounts = revenue and expense accounts
5. Prepare the Income Statement
6. Use Net Income to update Retained Earnings and prepare the Balance Sheet
7. Prepare the Cash Flow Statement

Question 28

What 3 questions should you ask when analysing transactions for journal entries?

Answer 28

1. Which specific asset, liability, stockholders’ equity, revenue or expense accounts does the transaction affect?
2. Does the transaction increase or decrease the affected accounts?
3. Should the accounts be debited or credited?

Question 29

What are the 5 most common adjusting entries?

Answer 29

1. Closing inventory
2. Accruals
3. Prepayments
4. Depreciation
5. Bad and doubtful debts