Financial Edge - Revenues & Costs

Question 1

How does income statement link two balance sheets?

Answer 1

Shows what happens in the period between two balance sheets

Question 2

Is an income statement for a point in time or a period of time?

Answer 2

Period of time - point in time is the balance sheet

Question 3

What is the matching principle?

Answer 3

Sales and costs should be matched; expensed when the item is delivered, so sales and costs should appear at the same time

Question 4

When can you recognise revenue?

Answer 4

Upon delivery or service performance

Question 5

Why does revenue recognition rules mask cash flow?

Answer 5

Because the product could have been paid for by credit card, and therefore you need to work out the cash impact

Question 6

When would P&O cruises receive cash, and when would they record revenues?

Answer 6

Receive cash on booking months before cruise, would recognise on income statement once the customer has been on the cruise

Question 7

When would Walmart receive cash, and when would they record revenues?

Answer 7

If customer pays with debit card, usually would be at the same time.

If credit card, may receive cash after the transaction

Question 8

When would Manchester Untied receive cash when they sell season tickets, and when would they record revenues?

Answer 8

Revenue recognised as each match occurs, will receive cash up front

Question 9

When would EDF energy receive cash, and when would they record revenues?

Answer 9

Record revenues as energy use occurs, receive cash at end of period

Question 10

Superdry sells a t-shirt. What will be the effect on the balance sheet?

Answer 10

Depends on sale price

Cash goes up, inventory goes down, profit comes through based on retained earnigns

Question 11

British Airways sells a flight on day 1. The flight takes place on day 30. What is the effect on the balance sheet on day 1?

Answer 11

Cash goes up, deferred revenue increases the liability side

Question 12

British Airways sells a flight on day 1. The flight takes place on day 30. What is the effect on the balance sheet on day 30?

Answer 12

Deferred revenue is expensed, profits go up so retained earnings go up

Overall, cash and retained earnings are up, whilst deferred revenue is unchanged

Question 13

Walk through an income statement

Answer 13

Sales/Revenue
COGS
Gross Profit

SG&A
Operating Profit

Interest/Finance expense
EBT

Tax expense
Net Income