Week 3 - Lecture 3

Question 1

What is included in the Income Statement?

Answer 1

• **income statement **= statement of Financial Performance = Statement of Profit or Loss
• Formula: Income - Expenses = Profit or Loss
  -** Purpose:** the statement reports the profitability of the business over a specific period to **stakeholders, **helping them assess the **business’s viability **

Question 2

define income

Answer 2

an increase in assets or a decrease in liabilities that reuslts in an increase in equity (excluding equity-holder contributions)
- forms of income: revenue, sales, fees, interest, dividends, royalties

Question 3

define expenses

Answer 3

• a decrease in assets or an increase in liabilities that **reduces equity (excluding distributions to owners)
  - Incurring an Expense: reduces equity **

Question 4

what is accrual accounting?

Answer 4

• records revenue when it is earned and expenses when they are incurred, regardless of when** cash is exchanged **
  -** revenue:** earned when goods are delivered or services are performed
  - expenses: recorded when incurred, even if payment is made later

Question 5

what is cash accounting?

Answer 5

revenue and expenses are recorded only when cash changes hands

Question 6

3 examples of income recognition

Answer 6

1. earned income: when goods are delivered or services are provided, even if cash has not been recieved
   2.** accrued income:** income that has been earned but not yet recieved (e.g. credit sales)
2. unearned income: payment received before goods or services are provided (eg. customer prepayments)

Question 7

2 types of expense recognition examples

Answer 7

1. prepaid expense (eg. rent): not an expense at the time of payment but recognized gradually as it is used
2. expense incurred (eg. electricity bill): recognised as an expense when the service is consumed, not when payment is made

Question 8

what is COGS?

Answer 8

• Cost of Goods Sold: represents the cost of the physical goods sold by the business
• Formula: Gross Profit = Sales Revenue - COGS

Question 9

define other expenses

Answer 9

include costs not directly related to the buisness’s core operations (e.g. research & development, losses on asset sales)

Question 10

what 2 ways can there be a connection between the Statement of Profit or Loss and Statement of Financial Position?

Answer 10

1. Temporary Accounts:
   - the **income and expenses **accounts are closed to zero at the **end of the period **and transferred to Retained earnings in the Statement of Financial Position
2. Equity Movement:
   - **Profit (or loss) **is transferred to retained earnings, which is a permanent account that **increases or decreases over time **

Question 11

what is the expanded accounting equation?

Answer 11

• income - expenses = profit or loss
• this equation shows how income increases equity and how expenses decrease equity
  **Ending equity = Opening equity + Profit (Income - Expenses) + contributions - Drawings/Dividends **

Question 12

example of recording transactions:

A company sells coffee for $450. The cost of goods sold is $100.

Answer 12

• Record the Sale: Increase cash by $450 (revenue)
• Record the cost of Goods Sold: decrease inventory by $100 (COGS) and increase the expense by $100 in the income statement

Question 13

Evaluating Business Performance

define Gross Profit Margin

Answer 13

measures how much profit is generated from sales after **deducting the cost of goods sold **

Question 14

Evaluating Business Performance

define operating expenses relative to operating income

Answer 14

How much of the **revenue is spent on operating expenses **

Question 15

Evaluating Business Performance

define Interpretation

Answer 15

looking at trends over time helps assess performance and identify areas for improvement