Test #2 Flashcards
income statement
summarizes the financial impact
of operating activities undertaken by the company
during an accounting period
Operating activities
are the primary source of revenues
and expenses
Revenues
amounts
earned by providing goods
or services to customers
Expenses
costs of
business necessary to earn
revenues
Net Income
indicates the amount by which shareholders’ equity will ultimately increase (or decrease) as a result of a company’s operations (revenues less expenses)
CASH Basis Accounting
Report revenues when cash is received and expenses
when cash is paid.
ACCRUAL Basis Accounting
Report revenues when they are earned and expenses
when they are incurred, regardless of the timing of
cash receipts or payments.
Revenue Recognition Principle
Revenues must be measured and recorded when it is
earned, not necessarily when cash is received
• Revenue is recognized when 3 conditions are met:
1) Earnings process is substantially complete (risks and
rewards have passed from seller to buyer)
2) Measurability is reasonably certain
3) Collectability is reasonably assured
UNEARNED REVENUE
occurs when a business receives cash
before goods or services are provided
It is a liability that represents a company’s obligation to
provide goods or services to customers in the future
Expense Recognition Principle
Matching Principle
Expenses must be recorded in the same period as the
revenues generated by the expenses, not necessarily
when cash is paid
PREPAID EXPENSE
occurs when a business pays cash before
goods or services are received
It is an asset that represents a company’s right to
receive goods or services in the future
Unadjusted Trial Balance
An internal report
that lists all
accounts and their
balances
• Checks to see if
Debits = Credits
Income Statement Limitations
Net Income does not equal the amount of
cash generated by the business
• Net Income may not be exact, because the
income statement often contains
estimates
• Net Income does not always represent the
change in a company’s value
