week 4

Question 1

what is the income statement

Answer 1

records the entity’s income and expenses
calculates if the entity has made a profit or loss
provides a summary of trading activities
allows users to evaluate financial performance

Question 2

what is income

Answer 2

increase in economic benefits during the accounting period in the form of inflows or the enhancements of assets or decreases of liabilities that cause increase in equity

Question 3

what is revenue

Answer 3

income earned in the period from normal trading activities

Question 4

what are gains

Answer 4

changes in asset values recorded in the accounts

Question 5

what is gross profit

Answer 5

profit after subtracting cost of sales

Question 6

what is operating profit

Answer 6

profit arising from the business’ operations

Question 7

what are expenses

Answer 7

yearly running costs, used up in the period being reported on

Question 8

what is profit or loss

Answer 8

total income made by the entity in the period - total expenses incurred

Question 9

how do you calculate cost of sales

Answer 9

opening inventory + purchases of inventory - closing inventory

Question 10

what is cost of sales

Answer 10

costs directly incurred from selling goods
purchases of inventory need to adjust purchase return and transport inwards
- purchase return
+ carriage inwards

Question 11

what accounting concepts are relevant to the I/S

Answer 11

recognition - revenue is recognised by the entity when the sale has been carried out
realisation - the entity has received cash for the sale/service or if it has received other assets
accruals concept - revenue and expenses must be recorded in the period where they arose

Question 12

what are the rules for revenue recognition

Answer 12

revenue is recognised when performance obligations in the contract are performed
there is an increase in cash or trade recievables as a result of the transaction

Question 13

what is capital expenditure

Answer 13

associated with items that appear on the balance sheet as an asset and are used for more than one accounting period

Question 14

what is revenue expenditure

Answer 14

short term items that appear in the income statement as an expense

Question 15

what are the two main types of expense

Answer 15

product costs and period costs

Question 16

what are product costs

Answer 16

costs that can be directly matched with revenues
related to the production of a product or service
included in cost of sales
may be carried forward to be matched with the revenues they generated

Question 17

what are period costs

Answer 17

costs/expenses which generate revenue but are not directly traceable to the sale of a specific item
associated with the passage of time
expensed in the period in which they occur

Question 18

what are administration costs

Answer 18

salaries of accounting staff, office overheads, heat, light etc

Question 19

what are distribution/selling costs

Answer 19

salesmen salaries, credit control staff salaries, advertising and marketing etc

Question 20

what are finance costs

Answer 20

loan interest, bank charges, discounts etc

Question 21

what are accrued expenses (accruals)

Answer 21

payables for services received that have not been paid for at the end of the accounting year
they arise when expenses are paid after use
it is a liability on the balance sheet

Question 22

what are prepaid expenses (prepayments)

Answer 22

recievables in services that have been paid for but not received at the end of the accounting year
arise where expenses of the services are paid for in advance
an asset on the balance sheet

Question 23

how do you calculate accrued expenses

Answer 23

CB accruals + payment - OB accruals

Question 24

how do you calculate prepayments

Answer 24

OB prepayments + payments - CB prepayments

Question 25

why do you adjust the trial balance for accruals and prepayments

Answer 25

these changes are made after checking if all the expenses are correct at the year end
the same type of expenses often have accruals or prepayments each year
to prepare financial statements, start with trial balance and adjust if necessary