The Income Statement

Question 1

gross margin

Answer 1

obtained by subtracting from sales the cost of goods solds (COGS)

Question 2

retained earnings

Answer 2

sum of the company’s net income to date, less dividents, if any, paid to the owners.

Question 3

dividends

Answer 3

distributions of earnings to owners, usually in the form of cash. (reduces the retained earnings account) Not considered an expense, it is a distribution of equity capital therefore not shown on the income statement.

Question 4

realization concept

Answer 4

the process of converting assets (such as merchanidse for sale) into cash, cash equivalents, or good accounts receivable.

Question 5

2 conditions of realization

Answer 5

1. revenue must be earned (customer received the good) 2. revenue must be realized (customer has paid or expected to pay)

Question 6

IRFS recognition of revenue

Answer 6

1. seller transferred the significant risks and rewards of ownership of good 2. seller doesn’t have continuing managerial involvement 3. revenue can be measured reliably 4. probable that economic benefits associated with the transaction will flow to the seller 5. costs incurred or to be incurred in respect of the transaction can be measured reliably

Question 7

matching concept

Answer 7

what expenses should be recognized when revenue is recorded. Expenses should be recognized in the same period as the relevant revenues are recognized.

Question 8

conservatism concept

Answer 8

recommends that prudence be exercised in recording revnues and expenses. Revenues should by recognized only when reasonable certain, but expenses should be recognized as soon as reasonably possible

Question 9

amortization

Answer 9

cost from using an intangible non-current asset

Question 10

franchise fee

Answer 10

long-lived intangible asset.

Question 11

gross margin percentage

Answer 11

equals gross margin divided by sales

Question 12

return on sales

Answer 12

equals net income divided by sales