Week 10 - Income statement

Question 1

Purpose of Income statements, plus another name?

Answer 1

Details profit = Income - expense

AKA - Statement of financial performance

Question 2

Why produce Income statements?

Answer 2

1. Legal requirements.
2. Information about financial performance required by internal and external stakeholders to help with:
   Internal - manage budgets, performance measures.
   External - Dividends, can wages be paid or increased.

Question 3

Whom receives income statements?

Answer 3

Shareholders, Investors, creditors, lenders, employees, customers, local communities.

Question 4

What should be reported on Income statements?

Answer 4

Depends on organisational goals + information rights for some stakeholders.
Accounting standards specifically require the disclosure of certain information.

Question 5

How should Income statements be presented?

Answer 5

For large or public companies it will be prepared in accordance with accounting standards.
For small business - they can choose how to disclose.

Question 6

What is meant by Income?

Answer 6

Increase in asset or decrease in liability

Increase in equity

Question 7

What is meant by Expense?

Answer 7

Decrease in asset or increase in liability

decrease in equity

Question 8

What is the Cost of sales?

Answer 8

It is the cost attributed to the sale of inventory/goods.

AKA - Cost of goods sold

Question 9

What are the 4 different ways to measure the cost of inventory?

Answer 9

1. Specific identification - assigns specific cost to specific goods.
2. Weighted-average cost - assigns average cost of inventory on hand.
3. First in / First out (FIFO) - earliest stock in first stock sold.
4. Last in / First out (LIFO) - not permitted in Australia. Most recent stock are assumed to be the first sold.

Question 10

What are the 2 ways in which to manage inventory?

Answer 10

1. Periodic system - stock is counted periodically (i.e. yearly stocktake) and assigned to closing inventory cost.
2. Perpetual system - recording all increases and decreases of inventory as they occur.

Question 11

What are the 2 different ways to present an Income statement?

Answer 11

1. Function of expenses - separate gross profit disclosed show gross profit after revenue - COGS
2. Nature of expenses - aggregated expenses according to their nature.