Financial Statements and Closing Entries

Question 1

Structure of income statement

Answer 1

1. Revenue/Sales (this will vary based on core biz of co)
2. Less COGS (=product cost/direct cost)
   - ——-
3. EQUALS GROSS PROFIT
   - ——-
4. Less Operating Expenses (SGA) = period costs
   - —–
5. EQUALS OPERATING INCOME (did company price goods or services high enough to cover cost of delivering those goods/services)
6. Less Interest, Gains and Losses ($ in or out not part of core biz)
   - ——–
7. Pre-tax income
8. Less income tax expense
   - —–
9. Net income

Question 2

what is the line

Answer 2

Operating income. investors and analysts will look at operating income. Mangers look to move unusual expenses below the line so the biz looks better.

Question 3

Temporary account

Answer 3

Accumulate effects of transactions for period of time only
R&E
closed out at end of accounting period

Question 4

Permanent account

Answer 4

Accumulate effects of transactions over the life of a business
B.S. accounts

Question 5

Order of Assets

Answer 5

Current Assets (benefit within next year; ordered by how readily can be converted to cash = liquidiity)

Cash
A/R
Inventory
Prepaid assets (these can never be converted to cash, just deferred expense)

Non-current assets

Tangible assets - PPE
Intangible assets - Software, TM, goodwill

Question 6

Order of liabilities

Answer 6

Current liabilities (obligations within the next year, ordered by liquidity)

Bank borrowings
A/P
Deferred Rev and other noncash

Noncurrent liabilitites (due beyond the year)
bank borrowings and bonds
other types of liabilities (deferred taxes, pensions)