Income and Expenses Flashcards
What is income in the context of financial reporting?
Income is any increase in equity that is not caused by an owner contribution. It reflects the value created by a business’s operations.
What is an expense in financial reporting?
An expense is any decrease in equity that is not caused by a distribution to owners. It represents the cost of operations and resource consumption.
Where are income and expenses reported?
They are reported in the Statement of Comprehensive Income using accrual accounting.
What are the two formats for presenting the Statement of Comprehensive Income?
-One statement: Profit or loss + Other Comprehensive Income (OCI).
-Two statements: Separate Income Statement (profit or loss) + Statement of Comprehensive Income (OCI).
What is Other Comprehensive Income (OCI)?
OCI includes income and expenses not recognized in profit or loss, such as revaluations of assets, foreign currency translations, and changes in own credit risk.
How is revenue defined?
Revenue is income arising from the ordinary activities of an entity, like the sale of goods or rendering of services.
When is revenue recognized?
Goods: When control transfers to the customer.
Services: When the service is provided and the customer benefits.
How is revenue measured?
At the amount the business expects to receive, accounting for variable consideration, performance obligations, and payment timing.
What are examples of expenses?
-Cost of sales (inventory costs)
-Operating expenses (depreciation, employee costs)
-Finance expenses (interest, bank charges)
-Bad debts expense
What is gross profit?
Gross profit = Revenue - Cost of sales.
What is the difference between expenses and distributions to owners?
Expenses reduce equity through operations.
Distributions (e.g., dividends) reduce retained earnings and are not expenses.
What is operating profit?
Operating profit = Gross profit - Operating expenses.
What is the purpose of earnings per share (EPS) disclosure?
EPS shows profitability per share, allowing comparability between companies and periods.
What is accrual accounting?
Accrual accounting recognizes income and expenses when transactions occur, not when cash is received or paid.
What is “quality of earnings”?
It measures how well reported profits convert into net cash inflows. Low quality may signal financial health concerns.
What are discontinued operations?
Profits or losses from business units sold or held for sale, reported separately from continuing operations.
How is Revenue defined in accounting?
Revenue is income arising in the course of an entity’s ordinary activities, such as the sale of goods or rendering of services.
How is revenue treated in contracts with multiple performance obligations?
Revenue is allocated and recognized separately as each obligation is satisfied.
What happens when revenue is recognized over time?
A reasonable measure of progress is used to recognize revenue in each reporting period.
What is deferred revenue?
A liability recognized when a business receives payment before transferring goods or services to a customer.
What is the impact of customer loyalty programs on revenue?
Some revenue is deferred as a liability until the customer redeems their rewards.
How is Cost of Sales defined?
It includes the cost of inventory sold, inventory losses, normal manufacturing waste, inventory write-downs, and reversals of previous write-downs.
Where is Cost of Sales reported?
Directly after Revenue in the statement of comprehensive income.
How does Cost of Sales relate to Income and Expenses?
It represents a decrease in equity not caused by owner distributions.
