Lesson 4 Flashcards
(26 cards)
What is an income statement
Is one of the key financial statements used to report financial performance over a specific period of time, typically a month, quarter, or year.
AKA Profit and Loss Statement
What question does the income statement answer
How much wealth was gained or lost from trading activities over a certain period
How is wealth/profit calculated
Profit = revenue - COGS
What does and income statement contain
a summary of a company’s revenues, expenses, gains, and losses, resulting in the net income or net loss for the period
What does the revenue section contain
A list of all revenues earned by the company from it primary activities such as sales of good or services
What does the COGS section contain
All the direct costs associated with producing the goods or services sold by the company.
It typically includes materials, labor, and overhead.
What does the gross profit section contain
Gross Profit = Total revenue - COGS.
It represents the profit generated from the company’s core business operations before deducting operating expenses.
What does the operating expenses section contain
all the expenses incurred by the company in the course of its normal operating activities.
Could include salaries, rent, utilities, marketing, and depreciation.
What does the operating Income (EBIT) section contain
Operating income = Gross profit - operating expenses
Represents the profit generated after deducting all operating expenses
What does the other income and expenses section contain
Includes any additional income, or expenses not directly related to the company’s core business operations.
May include gains or losses from investments, interest income, or interest expenses.
What does the net income section contain
The final figure on the income statement.
It represents the total profit or loss for the period after deducting all expenses, taxes, and other adjustments
What is the usual accounting period
1 year
Some large businesses produce a half yearly, or interim, (quarterly, monthly, weekly or even daily basis) to provide more frequent feedback on progress
How do you recognize revenue
Revenue can be from cash or trade receivables
Revenue can be recognized at various points. As examples:
- The time that order is placed by customer
- The time the order is received by customer
- The time the customer pays for the goods
A reliable criteria from recognizing revenue is that ownership and control of items should pass from the seller to the buyer.
How do you recognize expenditure and expenses
2 approaches:
- The matching convention:
Revenue expenditure should be matched to the revenue they create within the same accounting period.
Example: wages, rent etc. which goes into producing a unit which earns revenue
- The materiality convention
Where the amounts involved are immaterial, we should consider only what is reasonable.
This may mean that an item will be treated as an expense in the period in which it is paid, rather than being strictly matched to the revenue to which it relates
How do you recognize Profit and Loss
Profit tells how succesfull your company was in theory, not how much actual money you have received.
This is because you might not have received the cash yet.
You can record revenue before getting paid.
You can record expenses before actually paying.
How do you recognize depreciation
The depreciation charge is considered to be an expense of the period to which it relates in the income statement
It is spread out over the years to where it is relevant.
It is relevant for both tangible and intangible assets
How do you calculate depreciation for tangible non-current assets
4 factors have to be considered:
- the cost (or fair value) of the asset
- costs of acquiring the asset
- any delivery costs
- installation costs
- the useful life of the asset
- estimated number of years the assets can be used before being fully depreciated
- They depreciate or lose their physical and economic value overtime.
- They have both a physical life (effects of wear over time) and an economic life.
- Economic life is typically shorter.
- the residual value of the asset
- the value at which you decide to sell the asset
- Depreciation = Fair value – residual value
- the depreciation method.
- 2 methods: Straight line or Reducing balance
Explain the 2 depreciation methods for tangible assets
Straight line method:
Allocates the amount to be depreciated evenly over the useful life of the asset.
Reducing balance method:
Applies a fixed percentage rate of depreciation to the carrying amount (remaining amount) of the asset each year.
The amount is greater in the beginning an becomes smaller over time as the value of the assets decreases over time
how is depreciation considered for intangible assets
Intangible things like patents lose value over time, and we call that amortisation but it works a lot like depreciation.
How do you cost inventories
FIFO: you look at the purchase price of the earliest bought products
LIFO: you look at the purchase price of the latest bought products
3 weighted average cost: All inventories are put into 1 pool and get an average cost no matter when they are bought
What is the net realizable value of inventory
Net realizable value = Estimated selling price of inventory - Any further costs that may be necessary to complete the goods and any costs involved in selling and distributing the goods.
When could the net realizable value be lower
- goods have deteriorated or become obsolete
- there has been a fall in the market price of the goods;
- bad buying decisions have been made.
What is trade receivables
It’s when someone owes you money because you sold them something on credit
What is bad debt
Sometimes a customer never pays. That money becomes a bad debt and are basically lost money
