MD#1 : The Income Statement (1st Grading Period)

Question 1

• It STATEMENT is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year).
• It shows the costs and expenses associated with earning that revenue.
• The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.

Answer 1

Income Statement

Question 2

• This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)

Answer 2

Earnings Per Share (EPS)

Question 3

• It is the total amount of money brought in from sales of products or services.
• This top line is often referred to as ___ or ___.
• It’s called “___” because expenses have not been deducted from it yet. So the number is “___” or unrefined.

Answer 3

Gross Revenues or Sales, “Gross”

Question 4

• The next line is money the company doesn’t expect to collect on certain sales.
• This could be due, for example, to ___ or ___.

Answer 4

Sales Discounts or Merchandise Returns

Question 5

• When you subtract the returns and allowances from the gross revenues, you arrive at the company’s ___.
• It’s called “___” because, if you can imagine a ___, these revenues are left in the net after the deductions for returns and allowances have come out.

Answer 5

Net Revenues, “Net”, Net

Question 6

• The next line after net revenues typically shows the ___.
• This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period.

Answer 6

Costs of Sales

Question 7

• The next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “___” or sometimes “___.”
• It’s considered “gross” because there are certain expenses that haven’t been
  deducted from it yet.

Answer 7

Gross Profit or Gross Margin

Question 8

• The next section deals with “___”.
• These are expenses that go toward supporting a company’s operations for a given period

Answer 8

Operating Expenses

Question 9

• It is also deducted from gross profit.
• It takes into account the wear and tear on some assets, such as machinery, tools and furniture, which are used over the long term.
• Companies spread the cost of these assets over the periods they are used.
• This process of spreading these costs is called “___” or amortization.
• The “charge” for using these assets during the period is a fraction of the original cost of the assets.

Answer 9

Depreciation

Question 10

• After all operating expenses are deducted from gross profit, you arrive at operating profit before interest and income tax expenses.
• This is often called “___.”

Answer 10

Income From Operations

Question 11

• It is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like.

Answer 11

Interest Income

Question 12

• It is the money companies paid in interest for money they borrow.

Answer 12

Interest Expense

Question 13

2 Forms of Income Statement

Answer 13

Natural Form and Functional Form

Question 14

• It is the form of income statement where it has the nature of expense method.
• Used in service business.
• Single-step income statement.

Answer 14

Natural Form

Question 15

• It is the form of income statement where it has the costs of sales method.
• Used in merchandising business.
• Multiple-step income statement.

Answer 15

Functional Form

Question 16

• It includes revenues earned or generated by the business in performing services for a customer or client.

Answer 16

Service Income

Question 17

• It includes all payments made to employees or workers for
  rendering services to the company.

Answer 17

Salaries or Wages Expense

Question 18

• It is an expense related to the use of electricity, fuel, water, and telecommunications facilities.

Answer 18

Utilities Expense

Question 19

• It covers office supplies used by the business in the conduct of its daily operations.

Answer 19

Supplies Expense

Question 20

• It is the expired portion of premiums paid on insurance coverage such as premiums paid for health or life insurance, motor vehicles or other properties.

Answer 20

Insurance Expense

Question 21

• It is the annual portion of the cost of a tangible asset such as
  buildings, machineries, and equipment charged as expense for the year.

Answer 21

Depreciation Expense

Question 22

• It means the amount of receivables charged as expense for the period because they are estimated to be doubtful of collections.

Answer 22

Uncollectible Accounts Expense/ Doubtful Accounts Expense/ Bad Debt Expense

Question 23

• It is the amount of money charged to the borrower for the use of borrowed
  funds.

Answer 23

Interest Expense

Question 24

• The first line after the heading of the income statement is the ___.
• To show the details of its computation, it is supported by a note to financial statement.

Answer 24

Net Sales

Question 25

• It represents the cost of merchandise inventory sold by the business to its customers.

Answer 25

Cost of Sales or Cost of Goods Sold

Question 26

• It is income derived from sources other than the company’s main line of business.
• Examples are interest income, dividends income, commissions income, rent income, and gain on sale of assets.

Answer 26

Other Income

Question 27

• Are those incurred in directly selling the merchandise.

Answer 27

Distribution Expenses / Selling Expense

Question 28

• These are expenses necessary in the management of the office.

Answer 28

General / Administrative Expenses

Question 29

• These are expenses not connected to the operating activities of the business.

Answer 29

Other Expenses

Question 30

• These are are the interest expense paid for the use of borrowed funds.

Answer 30

Finance Cost