Module 3 The Income Statement

Question 1

What are some alternate names for the income statement?

Answer 1

Profit and Loss Statement P&L

Earning Statement

Question 2

What are the 2 major groups of accounts included in the income statement?

Answer 2

• Revenue/Sales

- Expenses

Question 3

What happens to the net income (loss) at the end of the year when the income statement is closed out?

Revenue - expenses = net income

Answer 3

The income or loss is transferred to the retained earnings section of the balance sheet

Question 4

What are the components of the formula to calculate net revenue/sales

Answer 4

gross Revenue/Sales - Returns, allowances, and discounts = net revenue/sales

Question 5

How is Cost of Goods Sold calculated as an expense on the income statement?

COGS are also considered (Cost of Sales)

Answer 5

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (COGS)

Question 6

How do you calculate Gross Margin for the Income Statement?

Answer 6

Net Sales - cost of goods sold (COGS)

Question 7

What is the gross margin ratio and how is it calculated?

Answer 7

Gross Margin ratio is the percentage of margin on sales: Net Sales - COGS = Gross Margin

Calculated by:
Gross Margin / Net Sales = Gross Margin Ratio

Question 8

What expenses are included in Operating Expenses?

Answer 8

• Selling Expenses

- General and Administrative expenses (G&A)

Question 9

What are 3 types of expense associated with the operating expense - selling (S)?

Answer 9

• Salaries and Benefits of sales people
• Commissions
• Travel and Entertainment

Question 10

What are some of the Operating Expenses associated with the expense - G&A, General and Administrative

Answer 10

Salaries (Admin and Office)
Rent
Utilities
Advertising
Repair and Maintenance
Supplies
Travel / Entertain
Insurance
R&D
Depreciation
Amortization

Question 11

Describe the operating expense - Depreciation

How is it calculated

Answer 11

Cost of Asset + Cost of Transportation/Install - Salvage Value (calculated over useful life)

Question 12

What methods of depreciation are allowed by GAAP?

Answer 12

Straight Line Depreciation

Double Declining Balance

Question 13

How is straight line depreciation calculated?

Straight line depreciation is the most commonly used method.

Answer 13

Asset Cost - Salvage Value
\
Estimated years useful life

Question 14

What is the primary difference between Straight Line Depreciation and the Double Declining Balance Method?

Answer 14

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)

Question 15

What is included in the Operating Expense - Impairment/Amortizations

Define both Impairment and amortization

Answer 15

Impairment = Used to right off good will

Amortization = value of intangible assets - straight line depreciation - based on useful life

Question 16

Define the Impairment Goodwill in terms of Operating Expenses

Answer 16

Good will occurs when on company acquires another and pays an amount in excess of the appraised value of the net assets

Question 17

How is Goodwill treated in the tax books, both Shareholder books and Tax Books

Answer 17

Shareholder books = impairment losses are based on GAAP (ASC 360)
Tax Books = Goodwill is amortized over 15 years (IRS Rules)

Question 18

How is a Patent Booked in relation to Operational expenses?

Answer 18

Purchased patents are amortized over useful life (nr. of years)

Question 19

Can you nail the calculations/formulas on page 77 - 92?

Answer 19

review calculations

Question 20

in terms of investments in subsidiaries and affiliates what percent investment does TAX LAW consider ownership?

Answer 20

for tax purposes, consolidation occurs at 80 percent. requiring consolidated financial statments

Question 21

in terms of investments in subsidiaries and affiliates what percent investment do SHAREHOLDER BOOKS consider ownership and consolidation of financial statements?

Answer 21

More than 50%

Question 22

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)?

Answer 22

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)

Question 23

What types of taxes are listed on the income statement as provisions?

Answer 23

Federal Income Tax
State Income Tax
Local Income Tax

Question 24

What 2 categories of taxes are included on the income statement? Federal, State, and Local

Answer 24

Current - Current taxes

Deferred - liability remaining in shareholder books after current taxes (deferred in shareholder books)

Question 25

Define the process steps included in calculating Net Income.

List the concurrent calculation steps to get to net income

Answer 25

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

Question 26

What are the 2 methods of reporting common stock and how are they calculated?

Answer 26

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.

Question 27

How to calculate (Return on Sales) or Net Profit Margin

Answer 27

Net Income as a percentage of sales…

Net Income / Net Sales

Question 28

Identify and describe the components of the income statement and their impact on a companies incentive plans.

Answer 28

Revenue-Sales
Expenses (net income)

Compensation plans should focus on Net Income (sales)

Question 29

Define Depreciation and calculate depreciable value, straight line depreciation and double declining balance depreciation.

Answer 29

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…

Question 30

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

Answer 30

C - Gross Sales minus Returns and Discounts

Question 31

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

Answer 31

A. Estimated Salvage Value

Question 32

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

Answer 32

A. Straight Line

Question 33

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.

Answer 33

B. Taxes resulting from Expenses recorded in a different time period on the income statement

Question 34

The equity method is the accounting approach used when a company owns what percentage of an affiliate.

Answer 34

20% to 50%

Question 35

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

Answer 35

C. Depreciation, Amortization, and SG&A