Week 15-16: Measuring and reporting financial performance Flashcards
What is the purpose of the income statement?
It reports a business’s financial performance over a period, showing revenue, expenses, and profit
What are the two key roles of the income statement?
It measures profit generated and provides insight into how profit was derived
What are the main sections of an income statement?
Revenue, cost of sales, gross profit, operating expenses, operating profit, and profit for the period
How does the income statement differ from the statement of financial position?
The income statement covers financial performance over time, while the statement of financial position is a snapshot at a specific moment
What is revenue?
Income earned from the sale of goods or services before expenses are deducted
What is cost of sales?
The direct costs of producing goods or services sold during the period
What is gross profit?
Revenue minus cost of sales
What is operating profit?
Gross profit minus operating expenses
What is profit for the period?
The final profit figure after deducting all expenses, including interest and taxes
What is the matching convention?
A principle stating that expenses should be recorded in the same period as the revenues they help generate
When should revenue be recognized?
When it is earned and measurable, not necessarily when cash is received
Why is revenue recognition important?
It ensures financial statements reflect true performance
What is an accrued expense?
An expense incurred but not yet paid
What is a prepaid expense?
An expense paid in advance for a future period
What is the materiality convention?
The principle that only significant information should be included in financial reports
What is the accruals convention?
It requires revenues & expenses to be recorded when they occur, not when paid
What is depreciation?
The systematic allocation of an asset’s cost over its useful life
What are the two main methods of depreciation?
Straight-line method and reducing balance method
What is residual value?
The estimated value of an asset at the end of its useful life
What is the carrying amount of an asset?
The original cost minus accumulated depreciation
What is FIFO (First In, First Out)?
An inventory method where the oldest items are sold first
What is LIFO (Last In, First Out)?
An inventory method where the newest items are sold first
What is AVCO (Average Cost)?
A method using the weighted average cost of all inventory items
What is an irrecoverable debt?
A debt that is unlikely to be collected and is written off
