Lesson 4 - Measuring Financial Performance Flashcards
(35 cards)
What is the purpose of an income statement?
To report how much wealth (profit or loss) a company generated during a specific period through its trading activities.
What is another name for the income statement?
Profit and Loss (P&L) Statement.
What is the basic formula used in an income statement to calculate profit?
Profit = Revenue – Cost of Goods Sold (COGS)
What does the income statement summarize?
Revenues, expenses, gains, and losses to determine net income or loss for the period.
What is gross profit and how is it calculated?
Gross Profit = Revenue – COGS; it shows profit from core operations before expenses.
What are operating expenses?
Costs incurred in normal business operations (e.g. salaries, rent, marketing, depreciation).
What is operating income (EBIT)?
EBIT = Gross Profit – Operating Expenses; it’s the profit from regular operations.
What is net income and what does it represent?
The final profit after all costs, taxes, and adjustments; it’s often referred to as “the bottom line.”
What is typically included under “Other Income and Expenses”?
Non-operating items like investment gains/losses, interest income/expense.
What is the key principle for recognizing revenue?
Revenue is recognized when significant risks and rewards of ownership transfer to the buyer.
What are valid points at which revenue can be recognized?
When control/ownership transfers to the customer — not necessarily at payment or order.
How should long-term contracts handle revenue recognition?
Break contracts into phases, assigning value to each phase to allocate revenue annually.
What is the materiality convention?
Immaterial expenses may be recorded when incurred, rather than strictly matched to revenue.
What is the matching convention in expense recognition?
Expenses should match the revenue they helped generate in the same accounting period.
How can services recognize revenue over time?
Use periodic subscription models to allocate revenue per accounting period.
Why does profit not equal net cash generated?
Because profit is based on accruals — revenue ≠ cash received, and expenses ≠ cash paid.
What costs contribute to the total value of an asset?
Purchase price, delivery, installation, legal fees, and improvements.
What is depreciation?
An expense that allocates the cost of a tangible asset over its useful life.
What four factors are needed to calculate depreciation?
Cost of asset, residual value, useful life, depreciation method.
What types of assets are depreciated?
Tangible non-current assets like machinery, buildings, equipment.
What is the ‘useful life’ of an asset?
The expected number of years the asset will be productive for the business.
How does the straight-line method work?
Evenly spreads depreciation across the asset’s useful life.
What is residual value?
The estimated disposal value of the asset at the end of its useful life.
What is the reducing-balance method?
Applies a fixed percentage to the asset’s decreasing carrying amount annually, resulting in higher early depreciation.
