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Accounting Assistant > Income Statement > Flashcards

Income Statement Flashcards

1
Q

What is another name for the income statement?

A

Statement of income, Statement of operations, Statement of earnings, Profit and loss (P&L) statement, Consolidated statement of income

These terms are often used interchangeably in financial reporting.

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2
Q

What does the income statement report?

A

Revenues, expenses, gains, losses, and net income

This information is for the accounting period indicated in the statement’s heading.

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3
Q

What are typical periods covered by an income statement?

A
  • Year ended December 31, 2023
  • Year ended June 30, 2023
  • Nine months ended September 30, 2023
  • Three months ended March 31, 2023
  • Month ended August 31, 2023
  • 52/53 weeks ended February 1, 2023

These periods can vary depending on the reporting needs of the business.

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4
Q

What is operating revenue?

A

Amounts earned from the company’s main business activities

Common examples include net sales for retailers or service fees for service providers.

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5
Q

What are operating expenses?

A

Expenses associated with the company’s main business activities

Common types include cost of sales, cost of services, and selling, general and administrative expenses.

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6
Q

How is operating income calculated?

A

Operating income = Operating revenues - Operating expenses

This figure reflects the profitability from core business operations.

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7
Q

What are nonoperating revenues or expenses?

A

Revenues or expenses resulting from activities outside of the company’s main business activities

Examples include investment income and interest expense.

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8
Q

What does ‘income before income tax expense’ represent?

A

The sum of operating income and nonoperating amounts

This figure indicates profit before tax liabilities are deducted.

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9
Q

What is net income?

A

Earnings remaining after subtracting income tax expense

This is a key indicator of a company’s profitability.

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10
Q

What does the accrual method of accounting entail?

A

Revenues are recognized when earned, not when cash is received

This is different from the cash basis of accounting.

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11
Q

What is a gain in the context of an income statement?

A

Reported when a company sells a long-term asset for more than its book value

For example, selling an asset for $10,000 when its book value is $6,000 results in a $4,000 gain.

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12
Q

What is a loss in the context of an income statement?

A

Reported when a company sells a long-term asset for less than its book value

For example, selling an asset for $5,000 when its book value is $6,000 results in a $1,000 loss.

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13
Q

What does the income statement not report?

A

The company’s cash receipts and disbursements

This information is found in the statement of cash flows.

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14
Q

What is a comparative income statement?

A

Displays three columns of amounts to show two years of previous income statement amounts

This provides context for the most recent year’s performance.

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15
Q

What is net sales?

A

Sales of goods minus returns, allowances, and discounts

It is typically the first amount shown on the income statement for product-selling companies.

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16
Q

What is the cost of sales (cost of goods sold)?

A

The company’s cost for the products sold during the specified period

This is often the largest operating expense for companies selling goods.

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17
Q

How is gross profit calculated?

A

Gross profit = Net sales - Cost of sales

This figure indicates the profitability before accounting for other expenses.

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18
Q

What are selling, general and administrative expenses (SG&A)?

A

Expenses that are not directly tied to production but necessary to operate the business

These include salaries, advertising, and office rent.

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19
Q

What is the significance of the heading of the income statement?

A

It includes the name of the company, the name of the statement, and the reporting period

This informs readers about the context of the financial data.

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20
Q

What is the purpose of notes to the financial statements?

A

To provide important information that cannot be adequately communicated by the amounts shown

These notes are essential for understanding the complexities of the business.

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21
Q

True or False: The income statement is one of a set of five financial statements.

A

True

The five statements include the income statement, statement of comprehensive income, balance sheet, statement of stockholders’ equity, and statement of cash flows.

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22
Q

What is required for a company to be profitable?

A

Gross profit must be greater than selling, general and administrative expenses and nonoperating items.

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23
Q

What does gross margin refer to?

A

Gross profit percentage, calculated as gross profit divided by net sales.

24
Q

What was the gross profit percentage for Example Corporation in 2023?

A

22.1%

25
Q

What are selling, general and administrative expenses commonly referred to as?

A

SG&A.

26
Q

What expenses are included in SG&A for a retailer?

A

Salaries, wages, rents, utilities, depreciation, advertising, insurance, and other primary activity expenses.

27
Q

What is the formula for operating income?

A

Operating income = operating revenues – operating expenses.

28
Q

What are the operating revenues for Example Corporation?

A

Net sales.

29
Q

What are operating expenses for retailers and manufacturers?

A

Cost of sales and SG&A expenses.

30
Q

True or False: Interest expense is considered an operating expense for most businesses.

A

False.

31
Q

What is recorded as a loss on the sale of equipment?

A

The difference when cash received is less than the asset’s book value.

32
Q

What does income before income taxes represent?

A

Operating income adjusted for nonoperating revenues and expenses.

33
Q

What must regular corporations report on their income statement?

A

The amount of income tax expense associated with the income statement items.

34
Q

What does net income represent?

A

The bottom line after subtracting income tax expense from income before income taxes.

35
Q

How does net income affect stockholders’ equity?

A

It increases retained earnings.

36
Q

What are the two major components of the statement of comprehensive income?

A
  • Net income (or net loss) from the income statement
  • Other comprehensive income.
37
Q

What items commonly appear as other comprehensive income?

A
  • Foreign currency adjustments
  • Unrealized gains/losses on pension plans
  • Unrealized gains/losses on hedging derivatives.
38
Q

How does other comprehensive income affect stockholders’ equity?

A

It increases or decreases accumulated other comprehensive income.

39
Q

Fill in the blank: Owner’s compensation does not appear on a ______ income statement.

A

sole proprietorship.

40
Q

What is the historical cost principle?

A

Income statement amounts are based on historical amounts at the time of the original transaction.

41
Q

What types of costs are not shown in the income statement?

A
  • Costs of making additional units
  • Opportunity costs.
42
Q

What is the opportunity cost of not producing additional loaves of bread?

A

The potential additional revenues missed.

43
Q

True or False: The internal income statements can differ from those required by US GAAP.

A

True.

44
Q

What is included in internal income statements for detailed monitoring?

A

Schedules of expenses for specific departments.

45
Q

What is the purpose of internal income statements?

A

To provide detailed financial information for internal management, differing from external reporting standards

46
Q

What is SG&A in the context of internal income statements?

A

Selling, General and Administrative expenses

47
Q

How can internal income statements help department managers?

A

By allowing them to monitor their specific expenses without distraction from other departments’ expenses

48
Q

What is a contribution margin?

A

The amount of net sales remaining after deducting variable costs and expenses

49
Q

Fill in the blank: Contribution margin = sales – all ______ costs and variable expenses.

A

variable

50
Q

What is the format used to emphasize the contribution margin in an internal income statement?

A

Contribution Margin Format

51
Q

What are some examples of major segments for which income statements can be prepared?

A
  • Consumer products division
  • Industrial products division
52
Q

In the example provided, what is the total net sales for Product Line 1?

A

$70,000

53
Q

What fixed expenses are subtracted after calculating the contribution margin?

A

Fixed costs and fixed expenses directly traceable to each product line

54
Q

True or False: Common expenses decrease when a product line is eliminated.

A

False

55
Q

What does the contribution margin format allow executives to see?

A

The relative profitability of products or segments and how profits change with volume changes

56
Q

Why is it important to consult with accounting and tax professionals?

A

To navigate complexities in financial statement reporting and income tax reporting

Accounting Assistant (14 decks)

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