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Stage 2 Accounting > Topic 2: Financial Statements (Income Statements) > Flashcards

Topic 2: Financial Statements (Income Statements) Flashcards

1
Q

What is the definition of an Income Statement?

A

The Income Statement is a general purpose report which shows the financial performance of the firm over the accounting period.

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2
Q

What happens when Revenue is greater than Expenses?

A

The business records a profit.

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3
Q

What happens when Expenses are greater than Revenue?

A

The business records a loss.

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4
Q

What is the Accounting Period Concept?

A

The life of the business must be divided up into equal reporting periods to measure the performance of the business.

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5
Q

What are some limitations of the Accounting Period Concept?

A
  1. If we choose a period that is too short, we could have problems of seasonal factors affecting business performance.
  2. Some Firms may need a longer period to gain a more consistent measure of performance.
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6
Q

What is Revenue?

A

Inflow of resources (cash) relating to goods or services during the accounting period.

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7
Q

What are Expenses?

A

A cost to the business (outflow of resources associated with the earning of revenue during the accounting period)

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8
Q

What is classified under ‘Revenue’?

A

The inflow of cash from the main activity of the business that occurs from its day-to-day operations.
Examples: Sales, Sales Return

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9
Q

What is classified under ‘Other Revenue’?

A

Minor sources of inflow that are a result from activities that are not part of the businesses day to day operations.
Examples: Commission Received, Interest Received

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10
Q

What is classified under ‘Cost of Goods Sold’ (COGS)?

A

Cost of buying the goods, bringing the goods into the store and getting them ready for sale.

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11
Q

What is classified under ‘Selling Expenses’?

A

The costs incurred in selling the goods.

Examples: Advertising, Promotions, sales staff salaries

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12
Q

What is classified under ‘Admin Expenses’?

A

Costs relating to the office or general running of the business.

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13
Q

What is classified under ‘Financial Expenses’?

A

Costs associated with the borrowing of money and extension of credit to customers.
*Costs associated with Loans and Debtors.

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14
Q

How are COGS written in the income statement?

A
  1. Opening Stock
  2. (Plus) Purchases
  3. Closing Stock - MUST BE LAST
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15
Q

What is the only item that appears in both financial statements?

A

Closing Stock:
Income Statement - (negative value in COGS)
Balance Sheet - Current Assets

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16
Q

Why do Service Firms not have COGS classification?

A

The business does not buy goods, they provide a service.

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17
Q

What is Gross Profit?

A

The profit resulting from the buying and selling of goods.

18
Q

What is Profit?

A

The final profit figure for the period after deducting all day to day operating expenses.

19
Q

What is Discount Allowed associated with?

A

Sales (Revenue)

*Negative Figure

20
Q

What is Discount Received associated with?

A

COGS.

*Negative Figure

21
Q

What is the (Individual) Expense Ratio and what is its acceptable range?

A

Measures the impact of the expense against the sales of the business.
Acceptable Range: The lower the result the better - needs to be compared to past trends

22
Q

What is the Gross Profit Margin and what is its acceptable range?

A

Measures the rate of return from the buying and selling of goods and the margin of profit available to cover operating expenses.
Acceptable Range: The higher the result the better - Must be compared to past performances and industry average.

23
Q

What is Accrual Accounting?

A

Records transaction when it occurs and in the period it relates to.

24
Q

What is Cash Accounting?

A

Records the transaction when cash is paid or received.

25
Q

What is the main difference between Cash and Accrual Accounting?

A

Time: Will show a difference in profit during an accounting period. HOWEVER, over the life of the business the profit figure will be exactly the same.
*No one system is better than recording profit over the life of the business.

26
Q

What are the two concepts related to Accrual Accounting of Revenue and Expenses?

A
  1. Faithful Representation

2. Accounting Period Concept

27
Q

What is Faithful Representation?

A

All financial information produced must accurately reflect the true financial position of the business. (Complete, Error-free and Unbiased)

28
Q

What is the Accounting Period Concept?

A

The life of the business must be divided up into equal reporting periods to measure the performance of the business.

29
Q

What is the Going Concern Assumption?

A

A business has an unlimited life and will continue to operate indefinitely.

30
Q

What is the issue when abandoning the Going Concern Assumption TOO LATE?

A

Business is misleading creditors and shareholders, by continuing to use credit knowing they will not be able to pay it back. They will be committing fraud.

31
Q

What is the issue when abandoning the Going Concern Assumption TOO EARLY?

A

Creditors and Shareholders will stop issuing credit, demand repayment and withdraw equity from the business.
*Lead to a definite closure of the business.

32
Q

What is Relevance?

A

Accounting information must be meaningful, significant and timely to be included in financial reports.

33
Q

What is the Materiality Assumption?

A

Accountants record the amounts/values in the financial statements in a form that are still significant to assist decision making.
*Extent of materiality depends on size of business

34
Q

What is the Consistency Doctrine?

A

A firm should use the same accounting methods and procedures from one accounting period to another.
*Easier to make more meaningful comparisons over previous year’s reports.

35
Q

What is the Major Limitation of the Consistency Doctrine?

A

The business will change over a number of years and will need to change the reporting methods to reflect the changes in the business.

36
Q

What evidence exists in the Balance Sheet that would confirm Accrual Accounting is being used?

A

Debtors and Creditors

37
Q

What evidence exists in the Income Statement that would confirm Accrual Accounting is being used?

A
  1. Bad and Doubtful Debts

2. Credit Purchases/Sales

38
Q

What is the definition of the Return on Total Assets Ratio and what is the acceptable range?

A

Measures the rate of return based on the businesses assets. Measures how well the business assets are performing and being used.
Acceptable Range: The higher the result the better. However, must be checked against past performances and industry average.

39
Q

Where is ‘Discount Allowed’ classified in the Income Statement?

A

REVENUE - NEGATIVE FIGURE

*Form Net Revenue Value.

40
Q

Where is ‘Discount Received’ classified in the Income Statement?

A

COGS - NEGATIVE VALUE

41
Q

Where is ‘Donation to Charity’ classified in the Income Statement?

A

ADMIN EXPENSES

Stage 2 Accounting (9 decks)

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