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.