Week 4 Flashcards
(23 cards)
What does an income statement record?
An entity’s income and expenses
It calculates whether the company has made a profit or loss.
What is the formula for income?
Income = Revenues + gains
This includes increases in economic benefits during the accounting period.
What is revenue?
Income earned in the period from normal trading activities (operating)
It arises from the ordinary activities of an entity.
What is gross profit?
Profit after only subtracting cost of sales
What is operating profit?
Profit arising from the business’ operations
What are ‘other income’?
Income from activities that are not core business, such as receiving interest
Define expenses in the context of an income statement.
Yearly running costs used up in the period being reported on
How do you calculate gross profit?
Deduct the cost of goods sold from revenue
What is the formula for cost of sales?
Opening inventory + Purchases - Closing inventory
What does ‘recognition’ mean in accounting?
Revenue is recognised when the sale/service has been carried out
What does ‘realisation’ refer to in accounting?
Cash for the sale/service has been received or is reasonably certain of being received
What is the accruals concept?
Revenues and expenses must be recorded in the period where they arose
What are product costs?
Costs directly related to the production of a product or service intended for sale
Examples include raw materials and wages for manufacturing workers.
What are period costs?
Costs/expenses that generate revenue but are not directly traceable to a specific item
Give examples of period costs.
- Electricity bills
- Stationery costs
What are accrued expenses?
Payables for services received that have not been paid for at the end of the accounting year
What are prepaid expenses?
Receivables for services that have been paid for but not received at the end of the accounting year
What is the accounting equation for accrued expenses?
OB Accruals + Expense (I/S) – Payment = CB Accruals (B/S)
What does OB stand for in accounting equations?
Opening Balance
What does CB stand for in accounting equations?
Closing Balance
What does the term ‘accruals’ refer to in accounting?
Liabilities in the balance sheet that help calculate the correct expense number in the income statement
True or False: A prepayment is considered an expense.
False
A prepayment is an asset in the balance sheet.
How are expenses adjusted in the trial balance?
Expense numbers related to period costs are only recording the actual cash paid
