Week 2 The Income Statement

Question 1

___ is a financial statement that measures the performance of the firm over a period of time.

Answer 1

The income statement

Question 2

The basic equation of the ___ is Revenues – Expenses = Net Profit.

Answer 2

income statement

Question 3

The basic equation of the income statement is ___ = Net Profit.

Answer 3

Revenues – Expenses

Question 4

The basic equation of the income statement is Revenues – Expenses = ___.

Answer 4

Net Profit

Question 5

The income statement is also called ___.

Answer 5

the statement of profits and losses (the P&L)

Question 6

Depending on the country, net profit is referred to as ___ or ___.

Answer 6

net earnings / net income

Question 7

___ is an important figure because it reveals whether the firm is making money or not.

Answer 7

Net profit

Question 8

Net profit is an important figure because it reveals ___.

Answer 8

whether the firm is making money or not

Question 9

___ are increases in owners’ equity as a result of operations conducted by the firm with the intention of generating profits.

Answer 9

Revenues

Question 10

Revenues are ___.

Answer 10

increases in owners’ equity as a result of operations conducted by the firm with the intention of generating profits

Question 11

___ are decreases in owners’ equity as a result of operations conducted by the firm with the intention of generating profits.

Answer 11

Expenses

Question 12

Expenses are ___.

Answer 12

decreases in owners’ equity as a result of operations conducted by the firm with the intention of generating profits

Question 13

Because ___ equals net assets (assets – liabilities), we can also say that revenues increase net assets and expenses decrease net assets as a result of operations.

Answer 13

owners’ equity

Question 14

Because owners’ equity equals ___, we can also say that revenues increase net assets and expenses decrease net assets as a result of operations.

Answer 14

net assets (assets – liabilities)

Question 15

Because owners’ equity equals net assets (assets – liabilities), we can also say that revenues ___ and expenses ___ as a result of operations.

Answer 15

increase net assets / decrease net assets

Question 16

It is crucial to realize that revenues are not ___ and expenses are not ___.

Answer 16

cash inflows / cash outflows

For instance, the revenue from credit sales is recognized before the cash is received and many expenses are recognized before payments are made, such as utilities, which are first consumed and recognized as a utilities expense and later paid for.

Question 17

The top line of the income statement is always ___

Answer 17

revenues: the inflow of net assets as a result of selling goods or performing services

Question 18

The second line of the income statement is ___

Answer 18

the cost of the goods sold (cost of sales) or of the services performed.

Question 19

The difference between revenue and cost of sales (or services) is called ___.

Answer 19

gross profit (aka net profit)

Question 20

___ is called gross profit.

Answer 20

The difference between revenue and cost of sales
(or services)

Question 21

The difference between revenue and all the operating expenses is called ___.

Answer 21

operating profit

Question 22

___ is called operating profit.

Answer 22

The difference between revenue and all the operating expenses

Question 23

After operating profit, firms report financing costs (e.g., interest expense) and income from financial investments; this is called ___.

Answer 23

profit before tax

Question 24

After operating profit, firms report ___; this is called profit before tax.

Answer 24

financing costs (e.g., interest expense) and income from financial investments

Question 25

Finally, the difference between all the revenues and expenses is the ___ from continuing operations

Answer 25

net profit

Question 26

Finally, ___ is the net profit from continuing operations

Answer 26

the difference between all the revenues and expenses

Question 27

A firm recognizes revenues when the transaction fulfills the following conditions:

a) ___
b) The firm has received cash or some other asset

Answer 27

The firm has done all that it has promised to do for the customer

Question 28

A firm recognizes revenues when the transaction fulfills the following conditions:

a) The firm has done all that it has promised to do for the customer
b) ___

Answer 28

The firm has received cash or some other asset

Question 29

A firm recognizes an expense when either of the following conditions holds:

a) ___
b) The consumption of an asset (or the incurrence of a liability) results from the passage of time (e.g., depreciation expense, interest expense).

Answer 29

The consumption of an asset results from a transaction that leads to the recognition of revenue

Question 30

A firm recognizes an expense when either of the following conditions holds:

a) The consumption of an asset results from a transaction that leads to the recognition of revenue
b) ___

Answer 30

The consumption of an asset (or the incurrence of a liability) results from the passage of time (e.g., depreciation expense, interest expense).

Question 31

The net effect unrealized gains and losses that arise from changes in the value of assets or liabilities, and not from transactions is called ___.

Answer 31

other comprehensive income (OCI)

Question 32

___ is called other comprehensive income (OCI).

Answer 32

The net effect unrealized gains and losses that arise from changes in the value of assets or liabilities, and not from transactions

Question 33

At the bottom of the income statement, firms report ___.

Answer 33

earnings per share (EPS)

Question 34

___ is the net profit (with some minor adjustments) divided by the weighted average number of shares outstanding during the period.

Answer 34

Earnings per share (EPS)

Question 35

Earnings per share (EPS) is ___.

Answer 35

the net profit (with some minor adjustments) divided by the weighted average number of shares outstanding during the period

Question 36

The figure of ___ is closely followed by financial analysts, who try to forecast it using all the available information.

Answer 36

earnings per share