Module 3 The Income Statement Flashcards
What are some alternate names for the income statement?
Profit and Loss Statement P&L
Earning Statement
What are the 2 major groups of accounts included in the income statement?
- Revenue/Sales
- Expenses
What happens to the net income (loss) at the end of the year when the income statement is closed out?
Revenue - expenses = net income
The income or loss is transferred to the retained earnings section of the balance sheet
What are the components of the formula to calculate net revenue/sales
gross Revenue/Sales - Returns, allowances, and discounts = net revenue/sales
How is Cost of Goods Sold calculated as an expense on the income statement?
COGS are also considered (Cost of Sales)
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (COGS)
How do you calculate Gross Margin for the Income Statement?
Net Sales - cost of goods sold (COGS)
What is the gross margin ratio and how is it calculated?
Gross Margin ratio is the percentage of margin on sales: Net Sales - COGS = Gross Margin
Calculated by:
Gross Margin / Net Sales = Gross Margin Ratio
What expenses are included in Operating Expenses?
- Selling Expenses
- General and Administrative expenses (G&A)
What are 3 types of expense associated with the operating expense - selling (S)?
- Salaries and Benefits of sales people
- Commissions
- Travel and Entertainment
What are some of the Operating Expenses associated with the expense - G&A, General and Administrative
Salaries (Admin and Office) Rent Utilities Advertising Repair and Maintenance Supplies Travel / Entertain Insurance R&D Depreciation Amortization
Describe the operating expense - Depreciation
How is it calculated
Cost of Asset + Cost of Transportation/Install - Salvage Value (calculated over useful life)
What methods of depreciation are allowed by GAAP?
Straight Line Depreciation
Double Declining Balance
How is straight line depreciation calculated?
Straight line depreciation is the most commonly used method.
Asset Cost - Salvage Value
\
Estimated years useful life
What is the primary difference between Straight Line Depreciation and the Double Declining Balance Method?
Double Declining Balance Method disregards salvage value until the last year - results in a more aggressive depreciation value earlier in the depreciation period.
used for assets the depreciate more rapidly in the first 2 years (or so)
What is included in the Operating Expense - Impairment/Amortizations
Define both Impairment and amortization
Impairment = Used to right off good will
Amortization = value of intangible assets - straight line depreciation - based on useful life
Define the Impairment Goodwill in terms of Operating Expenses
Good will occurs when on company acquires another and pays an amount in excess of the appraised value of the net assets
How is Goodwill treated in the tax books, both Shareholder books and Tax Books
Shareholder books = impairment losses are based on GAAP (ASC 360)
Tax Books = Goodwill is amortized over 15 years (IRS Rules)
How is a Patent Booked in relation to Operational expenses?
Purchased patents are amortized over useful life (nr. of years)
Can you nail the calculations/formulas on page 77 - 92?
review calculations
in terms of investments in subsidiaries and affiliates what percent investment does TAX LAW consider ownership?
for tax purposes, consolidation occurs at 80 percent. requiring consolidated financial statments
in terms of investments in subsidiaries and affiliates what percent investment do SHAREHOLDER BOOKS consider ownership and consolidation of financial statements?
More than 50%
in terms of investments in subsidiaries and affiliates what percent investment do SHAREHOLDER BOOKS consider subsidiary affiliates?
What accounting approach is applied for both (Subsidiaries and Affiliates)?
20% - 50% Equity Approach (Investment as an asset adjusted by profit and dividend
Less than 20% - Cost Method Approach (investment as an asset, dividends are income)
What types of taxes are listed on the income statement as provisions?
Federal Income Tax
State Income Tax
Local Income Tax
What 2 categories of taxes are included on the income statement? Federal, State, and Local
Current - Current taxes
Deferred - liability remaining in shareholder books after current taxes (deferred in shareholder books)
Define the process steps included in calculating Net Income.
List the concurrent calculation steps to get to net income
Gross Sales - Returns and Discounts = Net Sales
Net Sales - Cost of Goods Sold (COGS) = Gross Margin
Gross Margin - Operating Expenses = Operating Income
Operating Income - Other Income Expenses = Income before tax
Income before tax - Provision for tax = Net Income
What are the 2 methods of reporting common stock and how are they calculated?
Basic - reports net income per share of common stock
Calculate: Net Income / Average Number of Shares Outstanding
Diluted - same calc as basic but includes share equivalents such as warrants, unexercised stock options, etc. in the divisor.
How to calculate (Return on Sales) or Net Profit Margin
Net Income as a percentage of sales…
Net Income / Net Sales
Identify and describe the components of the income statement and their impact on a companies incentive plans.
Revenue-Sales
Expenses (net income)
Compensation plans should focus on Net Income (sales)
Define Depreciation and calculate depreciable value, straight line depreciation and double declining balance depreciation.
Straight line = 1/useful life - Cost - Salvage / Nr. of Years = annual depreciation expense
Double Declining Depreciation = 2/useful life (Cost / nr. of years) *does not consider salvage…
Which of the following best describes net sales?
A - Sale of services plus cost of goods
B- Revenue from property rentals
C - Gross Sales minus Returns and Discounts
D - Sale of goods and services
C - Gross Sales minus Returns and Discounts
Which of the following must be known in order to calculate straight line depreciation?
A. Estimated salvage value
B. Units of production
C. Gross Market Value
D. Net Market Value
A. Estimated Salvage Value
What is the method used to calculate the amortization of patents
A. Straight Line
B. Units of production
C. Gross Market Value
D. Double the straight line
A. Straight Line
What are deferred taxes?
A. Taxes that are not due in the current year because of projected depreciation/amortization
B. Taxes resulting from expenses recorded in a different time period on the income statement and tax return
C. Taxes that are refunded after accounting for returns
D. Taxes paid by subsidiaries that have 50% or more ownership of an investment.
B. Taxes resulting from Expenses recorded in a different time period on the income statement
The equity method is the accounting approach used when a company owns what percentage of an affiliate.
20% to 50%
Which income statement items are used in the calculation of operating expenses?
A. Dividend and interest income, and interest expense
B. Net sales, cost of goods sold, and gross margin
C. Depreciation, Amortization, and SG&A
C. Depreciation, Amortization, and SG&A
