Chapter 3: The Income Statement

Operating activites

_________ occur routinely and are necessary for running a business. They have a shorter duration.

Selling or buying a good or service

What is an example of an operating activity?

operating cycle

The transaction between a company and a customer when selling goods or services is called the __________.

Buying goods and services. Paying cash to suppliers and/or employees. Selling goods and services. Receiving money from customers.

The order of the operating cycle:

Debit an asset Credit a liability

The journal entry for buying goods and services:

Debit a liability Credit cash

The journal entry for paying suppliers or employees:

Debit accounts receivable Credit revenue

The journal entry for selling goods and services:

Debit cash Credit accounts receivable

The journal entry for receiving cash from customers:

temporary

The accounts under the Income Statement are __________.

permanent

The accounts under the Balance Sheet are __________.

business activities over a period of time (month ended, year ended).

The Income Statement records:

Assets, liabilities, and stockholders' equity

The Balance Sheet records:

Revenues

________ are the amount of money generated from selling goods or services. They're recorded when earned (after doing the sale or service).

Expenses

__________ are costs incurred from business operations. They're recorded when resources are used up (ex: supplies, land, etc).

Net Income or Loss

__________ measures the company's success.

net income

To get _________, revenues must be greater than expenses.

increases

Net Income __________ stockholders' equity.

net loss

To get __________, expenses must be greater than revenues.

decreases

Net Loss ___________ stockholders' equity.

The equation to calculate Net Income/Loss:

Time Period Assumption

The Income Statement uses __________, which divides the company's long life into shorter chunks of time such as months, quarters, and years.

Cash Basis Accounting

__________ records revenues when cash is received and expenses when cash is paid.

Accrual Basis Accounting

In ________, revenues are recorded when earned and expenses are recorded in the same period as correlated revenues (regardless of cash received or payment)

GAAP (Generally Accepted Accounting Principles) IFRS (International Financial Reporting Standard)

The accounting standards include:

accrual accounting

Both GAAP and IFRS use ___________ for external reporting of income.

Revenue Recognition Principle

The __________ says that revenues are acknowledged when the good or service is provided to the customer.

Cash is received before a service or sale. Cash comes in with the service or sale. Cash comes after the service or sale.

The three scenarios that apply to revenues:

Deferred Revenue

__________ is a liability on the Balance Sheet. It means a business made a promise to provide a sale or service to its customer.

"on account"

The term __________ means you bought a good or service without cash and will owe cash to the company in the future.

Accounts Receiable

__________ is an asset on the Balance Sheet. It is the company's right to collect cash from a customer who paid "on account"

Expense Recognition Principle

The ________ (aka "matching) "means expenses are recorded in the same period as revenues.

Cash is paid before the expense. Cash is paid and expense is reported in the same period. Cash comes after the expense is reported.

The three scenarios that can apply to expenses:

Accounts Payable

__________ is a promise to pay in the future.

Expanded Accounting Equation

The __________ breaks down the contents of Stockholders' Equity.

Common Stock and Retained Earnings

The two subcategories of Stockholders' Equity:

Retained Earnings

Revenues and expenses are the subcategories for __________.

Have a normal credit balance. Increases Net Income. Increases Retained Earnings

Characteristics of Revenue:

Have a normal debit balance. Decreases Net Income. Decreases Retained Earnings.

Characteristics of Expense:

T-account

Each individual __________ is totaled to find the ending balance.

adjusted trial balance

An __________ makes sure debits equal credits after finding the ending balances for each account. Adjustments are made if needed.

Net Profit Margin

The _________ is the profit made from revenues.

The equation to calculate Net Profit Margin:

exact

Net income is NOT __________, it is an estimate.

cash

Net Income is NOT the ____ generated by the business.

value

Net Income does NOT report the change in the company's _____ during the period.