Basic Accounitng Concepts: The income statement

Question 1

Net income = ?

Answer 1

Money that comes in - Money the goes out

Question 2

What is the relation between net income and owners’equity?

Answer 2

The net income concurs in increasing or decreasing the retained earnings entry

Question 3

Retained earnings = ?

Answer 3

(Net income (or loss)) - (Dividends paid out)

If RE increases there’s a revenue, if it decreases there’s an expense

Question 4

What does the conservatism concept state?

Answer 4

Anticipate no profit but anticipate all losses, meaning that a revenue should be recognized only when it is reasonably certain, wether an expense should be recognized when reasonably possible

Question 5

What does the realization concept state?

Answer 5

It states that the amount of revenue that should be recognized froma sale is the amount that customers are reasonably certain to pay

Question 6

What does the matching concept state?

Answer 6

It states that when an event affects both revenues and expenses, the event should be recognized in the same accounting period

Question 7

What are dividends?

Answer 7

They are a distribution of net income. They reduce cash and retained earnings for the same amount.

Question 8

What is the difference between expense and expenditure?

Answer 8

Expenditure us an asset of increase or decrease of liability that takes place when a good or service is acquired

Question 9

What does the consistency concept state?

Answer 9

It states that once an entity has decided on one accounting method it should use the same method for all subsequent events

Question 10

What does the materiality concept state?

Answer 10

It states that insignificant events should be disregarded, but there must be full disclosure of all important information

Question 11

Gross Margin percentage = ?

Answer 11

[(Gross Margin) / (Net Sales)] * 100 %

Question 12

Profit Margin percentage = ?

Answer 12

[(Net Income) / (Net Sales)] * 100 %