Accounting 201: Intermediate Financial Accounting I Ch 5. Preparing an Income Statement

income statement

whether or not a company made a profit or incurred a loss in an accounting period

Revenue

the money that a company takes in

Expenses

money that a company pays out

Net Income

amount of money that is left after a company subtracts from their revenue

Explain the purpose of an income statement.

1. To list all the income accounts and their balances

2. To list all the assets, liabilities, and owners' equity accounts and their balances

3. To tell whether or not a business made money or lost money in a given time period

4. To tell how much money made in a business was retained and reinvested in the business

To tell whether or not a business made money or lost money in a given time period

How can money be brought into a company?

1. As revenue

2. As liabilities

3. As net loss

4. As expenses

As revenue

Which of the following is the primary purpose of an income statement for business owners?

1. It tells them whether or not the company is operating profitably.

2. It tells them what types of activities have an effect on the cash balance of the company.

3. It tells them all the accounts that the company has.

4. It tells them whether their employees are following guidelines.

It tells them whether or not the company is operating profitably.

On an income statement, _____ is/are the money that a company pays out.

1. revenue

2. net loss

3. expenses

4. net income

expenses

Which of the following is the equation used for the basic income statement?

1. Revenue / Expenses = Net Income or Net Loss

2. Revenue + Expenses = Net Income or Net Loss

3. Revenue - Expenses = Net Income or Net Loss

4. Expenses + Revenue = Net Income or Net Loss

Revenue - Expenses = Net Income or Net Loss

income statement

statement that lists a company’s income and expenses for a set period of time

multi-step income statement

includes four measures of profitability

single-step income statement

lists only net income

gross income, gross margin, gross profit

net sales minus the cost of sales

operating income

calculated by subtracted operational expenses from the gross margin

Pre-tax income

operating income minus interest expense

extraordinary expenses

one-time expenses

net profit, net income

pre-tax income minus taxes and extraordinary expenses

earnings per share

calculated by dividing net income by the number of shares outstanding

If a business has a net profit of $2.5 million dollars and 650,000 shares of stock, what is its earning per share?

1. $2.6 dollars per share

2. $6.50 per share

3. $0.26 dollars per share

4. $3.85 dollars per share

$3.85 dollars per share

What type of financial document is used by a business to show its income and expenses during a specific time period?

1. Balance sheet

2. Statement of retained earnings

3. Statement of cash flows

4. Income statement

Income statement

If a company's net sales are $750,000 and its cost of sales is $270,000, what is the company's gross income?

1. $750,000

2. $480,000

3. $1,020,000

4. $500,000

$480,000

What is the difference between a multi-step income statement and a single-step income statement?

1. A single-step income statement contains four measures of profitability, while a multi-step income statement contains one measure of profitability.

2. A multi-step income statement contains four measures of profitability, and a single-step income statement contains one measure of profitability.

3. A multi-step income statement calculates income only once.

4. A single-step income statement calculates income at different points on the statement.

A multi-step income statement contains four measures of profitability, and a single-step income statement contains one measure of profitability.

Which of the following is an example of something that would be under operations expenses?

1. Interest

2. Utility bills

3. Price for inventory

4. Taxes

Utility bills

Cost of Goods Sold (COGS)

any cost directly related to the production of goods that are sold or the cost of inventory you acquire to sell to consumers

Income Statement

the financial statement in which a company reports its income and expenses

Cost of Inventory Sold

costs related to retail or wholesale inventory include:

• inventory purchases

• freight

• repackaging expenses

Cost of Manufactured Goods Sold

costs may include:

• inventory items used in the manufacture of the products

• labor and related expenses

• costs of the facilities directly used to make the product

• warehousing space used during the manufacturing process

• machinery lenses

• production supplies

• any other costs that are directly related to production of the goods

Services

direct expenses related to providing a service is usually the cost of labor per unit of service

What's the difference between a direct expense and an indirect expense for purposes of COGS?

1. Direct expenses must be incurred to produce the good or service, while an indirect expense doesn't have to be incurred to do so

2. A direct expense is tax deductible and an indirect expense is not

3. There is no difference

4. An indirect expenses doesn't affect the overall profitability of a company while a direct expense does

Direct expenses must be incurred to produce the good or service, while an indirect expense doesn't have to be incurred to do so

Sarah's Salon had an inventory of $50,000 at the first of the year. She made $20,000 in purchases and had $40,000 left in ending inventory. How much was her Cost of Goods Sold (COGS)?

1. $70,000

2. $20,000

3. $50,000

4. $30,000

$30,000

On which of the following financial statements is cost of goods sold reported?

1. Income statement

2. Balance sheet

3. Statement of shareholder equity

4. Cash flow statement

Income statement

You are a small manufacturer who spent $125,000 to produce your product last month. You already had $33,000 in finished goods in inventory and you ended the month with $40,000 worth of finished goods. What was your cost of goods sold last month?

1. $165,000

2. There is insufficient data to make the calculation

3. $158,000

4. $118,000

$118,000

You operate a small clothing boutique in a quaint downtown market. Your beginning inventory last month was $25,000 and you made another $10,000 in inventory purchases during the month and ended up with $18,000 of inventory left. What was your cost of goods sold?

1. $17,000

2. $28,000

3. $10,000

4. There is insufficient data to make the calculation

$17,000

Net profit

• net income

• amount of money a company has left after all expenses, including taxes, have been subtracted from total revenue

The amount of money received for goods or services is called _____.

1. Net Profit

2. Expense

3. Liability

4. Revenue

Revenue

Total Revenue- Total Expenses is the formula for calculating what?

1. Assets

2. Liabilities

3. Net Profit

4. Equity

Net Profit

Net Profit is also known as _____.

1. Gross profit

2. Net Income

3. None of the answers is correct

4. Gross Income

Net Income

XYZ Company had $1,750,000.00 in total revenue. The total expenses for the company were $1,175,000.00. What was the net profit for XYZ Company?

1. $2,925,000.00

2. $1,750,000.00

3. $575,000.00

4. $1,175,000.00

$575,000.00

Byron makes and sells flower arrangements for $50.00 per arrangement. His total expenses for each arrangement is $35.00. What is the net profit that Byron makes for each flower arrangement?

1. $85.00

2. $35.00

3. $50.00

4. $15.00

$15.00

Income Statement

financial report that takes the total of revenues and expenses for a certain period of time and calculates the bottom line

Net Loss

a negative result in total revenue - total expenses

Generally Accepted Accounting Principles (GAAP)

require an income statement to report gross profit and net profit

What is the basic idea of the ''matching principle?''

1. Total revenue should match total expenses whenever possible.

2. Revenues and the expenses required to earn those revenues should be matched and included in the same income statement.

3. The sales price of goods or services should approximately match the costs, plus a desired profit.

4. The accounting system used should match the type of business being conducted.

Revenues and the expenses required to earn those revenues should be matched and included in the same income statement.

Which of the following statements regarding the calculation of net loss is true?

1. GAAP prescribes a precise, exact formula for building an income statement.

2. There is no guidance for how to calculate net loss, except that the IRS mandates whichever method results in the highest tax liability should be used.

3. Different people may calculate net loss differently, such as how/if they account for their own wages and how they depreciate capital assets.

4. None of these statements are accurate.

Different people may calculate net loss differently, such as how/if they account for their own wages and how they depreciate capital assets.

How much is the net loss for a company that has $75,000 in revenues, $125,000 in cash collected from customers, $95,000 in expenses, and $100,000 in liabilities?

1. ($60,000)

2. ($25,000)

3. ($70,000)

4. ($20,000)

($20,000)

What is the net loss of a company that has total revenues of $25,000 and total expenses of $32,000?

1. $7,000

2. $32,000

3. Not enough information given to calculate net loss.

4. $57,000

$7,000

What is the formula for net loss?

1. Gross profit + Vendor credits - payroll - taxes

2. Total revenue - total expenses

3. Current revenues / current liabilities

4. Assets - liabilities

Total revenue - total expenses

income statement

profit and loss statement, displays a business’s performance over a specific period of time

EBIT

earnings before interest and taxes

Which of the following is a correct analysis of an income statement?

1. The owner can most likely pay himself $50,000 if the business has $60,000 in available earnings.

2. The owner can most likely pay himself $50,000 if the business creates $60,000 in revenue.

3. The owner can most likely pay himself $50,000 if the business creates $50,000 in revenue.

4. The owner can most likely pay himself $50,000 if his operating profits are $60,000.

The owner can most likely pay himself $50,000 if the business has $60,000 in available earnings.

If a business has $100,000 in revenue, $20,000 in expenses, and pays the owner $40,000, what is the business's operating profit?

1. $60,000

2. $80,000

3. $20,000

4. $40,000

$80,000

_____ is the money that is left in the business after all expenses, taxes, and owner draws have been made and can be reinvested in the business.

1. Retained earnings

2. Operating profit

3. Available earnings

4. Profit and loss

Retained earnings

Which taxes are included when completing an income statement?

1. Federal

2. Payroll

3. State

4. All of these are included.

All of these are included.

Which of the following is traditionally included as an expense which determines a business's operating profit?

1. Cost of goods sold

2. Interest

3. Owner's draw

4. Taxes

Cost of goods sold