Wk 3 Income Statement

Question 1

What is the aim of an income statement?

Answer 1

To report the profitability of the company’s operations over a specific period of time, showing net profit or loss

Question 2

What is an income statement used for?

Answer 2

• Evaluate past performance of the enterprise
• provide a basis for future performance
• assess the risk/uncertainty of achieving future cash flow

Question 3

What is accrual-basis accounting?

Answer 3

Revenues and costs recognised as they are earned or incurred, not as money is received or paid

Question 4

What is cash-basis accounting?

Answer 4

Revenues recognised when cash is received and expenses are recognised when cash is paid (not in accordance with IFRS)

Question 5

What is the cost of sales?

Answer 5

Direct costs incurred for the goods/services sold in the period

Question 6

What are operating expenses?

Answer 6

All other expenses incurred in trading activities (e.g. rent, utilities, wages, transport costs, stationery)

Question 7

What is depreciation?

Answer 7

Represents the loss in value of an asset over time, two methods of calculating (straight line or reducing balance)

Question 8

What 4 factors must be considered for a depreciation change?

Answer 8

• cost/fair value of the asset
• useful life of the asset
• residual value (disposal value)
• depreciation methods

Question 9

What is the straight line method for depreciation?

Answer 9

Loss of value will be spread equally over the useful life of an asset - depreciation amount is the same each yearW

Question 10

What is the reducing balance method for depreciation?

Answer 10

Work out the depreciation change as a percentage of the accounting value brought forward

Question 11

What is bad debt?

Answer 11

A good/service is bought on credit, customer may go bankrupt and be unable to settle the debt, this is bad debt (considered an expense to the business)