21: Understanding Income Statements Flashcards
(52 cards)
generally refers to the amount charged for the delivery of goods or services in the ordinary activities of the business
revenue
sometimes used to specifically indicate that the revenue has been adjusted
net revenue
reflect outflows, depletions of assets, and incurrences of liabilities in the course of the activities of the business
expenses
net income often referred to as:
the bottom line
increases or decreases in economic benefits, which mat or may not arise in the ordinary activities of the business
gains and losses
can be defined as: income minus expenses or revenue plus other income plus gains minus expenses or revenue plus other income plus gains minus expenses in the ordinary activities of the business minus other expenses and other losses
net income
expenses can be grouped together either by:
nature or function
revenue less cost of sale
gross profit or gross margin
results from deducting operating expenses such as selling, general, and administrative and research and development expenses from gross profit
operating profit
increases in economic benefits during the accounting period in which the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants
income
revenue is recognized when it is earned, so the company’s financial records reflect revenue from the sale when the risk and reward of ownership is transferred; this is often when the company delivers the goods or services
accrual accounting
record a liability when the cash is initially received and revenue would be recognized ad being earned over time as products and services are delivered
unearned revenue
revenue should be recognized to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods and services
revenue recognition
5 steps of recognizing revenue:
- identify the contracts with the customer
- identify the separate or distinct performance obligations in the contract
- determine the transaction price
- allocate the transaction price to the performance obligations in the contract
- recognize revenue when (or as) the entity satisfies a performance or obligation
an agreement and commitment, with commercial substance between the contracting parties, establishes each party’s obligations and rights
contract
decreases in economic benefits during the accounting period in the form of outflows and depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
expenses
matching of costs with revenues
matching principle
expenditures that less directly match revenues, are reflected in the period when a company makes the expenditure or incurs the liability to pay
period costs
specifically identify which inventory items were sold and which remained in inventory to be carried over to later periods
specific identification method
the oldest goods purchases ( or manufactured) are assumed to be the first sold and the newest goods purchased (or manufactured) are assumed to remain in inventory
FIFO method (first in, first out)
assigns the average cost of goods available for sale to the units sold and units remaining in inventory
weighted average cost method
newest goods purchased (or manufactured) are assumed to be the first sold and the oldest goods purchased (or manufactured) are assumed to remain in inventory
LIFO method (last in, first out)
an estimate of how much of the revenue will ultimately be uncollectible
allowance for doubtful accounts
recognize credit losses on customer receivables would be for the company to wait until such time as a customer defaulted
direct write-off method
