BMSH2003 Income Statement, Owner's Equity, and Cash Flows

A collection of vocabulary-style flashcards covering the components of the Income Statement, Statement of Owner's Equity, Statement of Cash Flows, and Financial Statement Analysis techniques.

Statement of Comprehensive Income

Also known as the income statement or profit and loss statement, this report measures the financial performance or the success of company operations for a given period.

Capital maintenance approach

A method that measures profit as the excess of ending capital over the beginning capital, after excluding the effects of transactions with owners.

Transaction approach

An approach where profit is measured as the difference between total income and total expenses for a reporting period based on recorded accrual transactions.

Income

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities resulting in increases in equity, encompassing revenues and gains.

Revenues

Increases in economic benefits that arise from the central or major revenue-producing activities of an enterprise, such as selling merchandise or providing services.

Gains

Increases in economic benefits that arise from incidental transactions to the operations of the entity.

Expenses

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets resulting in decreases in equity, encompassing operating expenses and losses.

Losses

Decreases in economic benefits resulting from incidental transactions rather than central operations.

Single-Step Income Statement

A format consisting of just two groupings, revenues and expenses, where expenses are deducted from revenues in one subtraction to arrive at net income.

Multiple-Step Income Statement

A format that uses multiple subtractions to separate operating revenues and expenses from non-operating ones to compute net income.

Sales returns

Occur when customers return defective, damaged, or otherwise undesirable products to the seller.

Sales allowances

Occur when customers agree to keep defective or undesirable merchandise in return for a reduction in the selling price.

Cost of Goods Sold (COGS)

A line-item aggregating direct costs associated with selling products to generate revenue, referred to in Filipino as puhunan.

Freight in

An account used to record the shipping costs of merchandise purchased by the company.

General and Administrative Expenses

Expenses not directly related to the merchandising function but necessary for effective business operation, such as home office utilities and admin salaries.

Selling expenses

Expenses directly related to the sale and delivery of merchandise, such as sales commissions, delivery, and advertising.

Statement of Changes in Owner's Equity (SOE)

A report that shows the owner's capital at the start of a period, the changes that affect capital (income, investments, withdrawals), and the ending capital.

Statement of Cash Flows

A statement reporting cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period.

Cash equivalents

Investments that can be quickly converted to cash and have a maturity of $90$ days or less when purchased, such as Treasury bills or commercial paper.

Operating activities

Cash flows primarily derived from the main revenue-producing activities of the business that enter into the determination of net income.

Investing activities

Cash flows related to making and collecting loans, and acquiring and disposing of long-term assets like Property, Plant, and Equipment (PPE) and intangibles.

Financing activities

Cash flow items involving liability and owners' equity, such as obtaining resources from owners and borrowing or repaying money from creditors.

Direct method

A method of reporting cash flows from operating activities where major classes of gross cash receipts and gross cash payments are disclosed separately.

Indirect method

A method of reporting operating cash flows whereby profit or loss is adjusted for non-cash transactions, deferrals/accruals, and items associated with investing/financing.

Horizontal analysis

Also known as trend analysis, it involves analyzing data over time by computing peso and percentage changes compared to a base statement.

Vertical analysis

An analytical technique where each item on a financial statement is expressed as a percentage of a base amount, such as total assets or net sales.

Liquidity Ratios

Ratios measuring the amount of liquid assets (current assets) relative to the amount owed to short-term creditors (current liabilities).

Net working capital

Calculated as $\text{Current assets} - \text{Current liabilities}$, indicating if a company can pay its creditors on time.

Current ratio

The basic test of liquidity calculated as $\frac{\text{Current assets}}{\text{Current liabilities}}$ to determine the adequacy of working capital.

Quick ratio (Acid-test ratio)

A more severe liquidity test calculated as $\frac{\text{Quick assets}}{\text{Current liabilities}}$, excluding inventory and prepayments.

Asset Management Ratios

Also known as utilization ratios, these measure how effectively a firm manages its assets to generate revenue and income.

Solvency Ratios

Also known as financial leverage ratios, these measure the ability of a business to use debt in maximizing shareholder value and meeting future claims.

Times-interest-earned (TIE)

Calculated as $\frac{\text{EBIT}}{\text{Interest expense}}$, measuring the firm's ability to meet annual interest payments with operating income.

Profitability Ratios

Measures of operating effectiveness relating earnings to a base such as assets, sales, or capital.

Return on assets (ROA)

Calculated as $\frac{\text{Net income}}{\text{Average total assets}}$, measuring overall asset profitability and operating efficiency.