Chapter 3: The Income Statement

These flashcards cover key concepts from Chapter 3, focusing on the Income Statement, operating transactions, accounting principles, and financial evaluations.

Operating Cycle

The period that begins with buying goods and services and continues through collecting cash from customers.

Income Statement

A financial report that summarizes revenues and expenses over a specific accounting period.

Revenues

Amounts a business earns from providing goods or services to customers.

Expenses

Costs incurred by a business to generate revenues during the accounting period.

Net Income

The amount remaining after expenses are subtracted from revenues; represents an increase in shareholders' equity.

Time Period Assumption

An accounting principle that divides a company's life into shorter periods (months, quarters, years).

Cash Basis Accounting

An accounting method that recognizes revenues and expenses only when cash is exchanged.

Accrual Basis Accounting

An accounting method that recognizes revenues when earned and expenses when incurred, regardless of cash transactions.

Revenue Recognition Principle

The guideline that dictates revenues are recognized when they are earned, not when cash is received.

Deferred Revenue

A liability that reflects cash received for goods or services that have not yet been delivered.

Expense Recognition Principle

Also known as the matching principle; expenses must be recorded in the same period as the revenues they relate to.

Unadjusted Trial Balance

A report that lists each account and its ending balance to ensure total debits and credits are equal.

Net Profit Margin

A profitability measure calculated as Net Income divided by Total Revenue, indicating the amount of profit from each dollar of revenue.

Limitations of Income Statement

Common misconceptions that net income does not equal cash generated or represent changes in company value and involves estimates.