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Financial Accounting - Vocabulary Flashcards

Retained Earnings (RE) - Key rule

  • Definition: RE represents accumulated profits not distributed as dividends.
  • Core formula: RE{End} = RE{Begin} + ext{Net Income} - ext{Dividends}
  • First year (new entity): RE_{Begin} = 0 (if no prior balance).
  • For multi-year analysis: compute year by year using the ending balance of the prior year as the beginning balance for the next year.
  • Example solving approach ( based on typical data in transcript )
    • 2023: RE{End,2023} = RE{Begin,2023} + NI{2023} - Div{2023}
    • 2024: RE{End,2024} = RE{End,2023} + NI{2024} - Div{2024}
  • Signs: Net income increases RE; Dividends decrease RE.
  • Practical tip: when data are garbled, use the formulas and cross-check with the balance sheet to ensure consistency.

Income Statement - Basics

  • Purpose: Show profitability over a period.
  • Structure (typical lines for a service/airline context):
    • Revenues
    • Ticket Revenues
    • Total Revenues
    • Expenses
    • Aircraft Fuel Expense
    • Landing Fees Expense
    • Repairs and Maintenance Expense
    • Salaries and Wages Expense
    • Supplies
    • Interest Expense
    • Income Tax Expense
    • Total Expenses
    • Net Income (Loss) = Total Revenues − Total Expenses
  • Key formula:
    • ext{Net Income} = ext{Total Revenues} - ext{Total Expenses}
  • Units: In many workbook problems, amounts are entered in millions; e.g., 10,000,000 → 10.
  • Important sign note: If Expenses > Revenues, Net Income is negative (Net Loss).
  • Example reference from transcript (National Airways):
    • Revenues: Ticket Revenues; Total Revenues
    • Expenses: listed items (Aircraft Fuel, Landing Fees, Repairs, Salaries, Supplies, Interest, Income Tax)
    • Total Expenses
    • Net Income (Loss) = Total Revenues − Total Expenses
    • Note: All amounts given in millions; verify signs when calculating.

Quick problem-solving steps (from transcript prompts)

  • Step 1: Identify what is missing (from income statement, retained earnings, or balance sheet).
  • Step 2: Compute Net Income from revenues and expenses when needed:
    • ext{NI} = ext{Total Revenues} - ext{Total Expenses}
  • Step 3: Compute Ending Retained Earnings with:
    • RE{End} = RE{Begin} + ext{NI} - ext{Dividends}
  • Step 4: Use the balance sheet identity to check consistency:
    • A = L + SE with SE = ext{Common Stock} + RE_{End} (assuming no other equity components).
  • Step 5: Pay attention to signs (positive for profits, negative for losses) and unit scaling (millions when instructed).
  • Step 6: For multi-year questions, carry over ending balances from year to year as beginnings for the next year.

Quick-reference templates (LaTeX-ready)

  • Retained earnings end of year:
    • RE{End} = RE{Begin} + ext{Net Income} - ext{Dividends}
  • Income statement net income:
    • ext{Net Income} = ext{Total Revenues} - ext{Total Expenses}
  • Balance sheet (conceptual):
    • A = L + SE, ext{ where } SE = ext{Common Stock} + RE_{End} ext{ (assuming no preferred stock)}
  • Unit note:
    • When instructed, enter amounts in millions; e.g., 10,000,000 becomes 10.

Data interpretation tips from the transcript (useful for last-minute reviews)

  • When provided with revenues, expenses, dividends, and beginning retained earnings, compute end-of-year figures step by step using the formulas above.
  • If a line item in the transcript appears inconsistent (e.g., sign on net income), rely on the underlying definitions: Net Income = Revenues − Expenses; Net Income signs must align with the overall result (positive for profit, negative for loss).
  • Always cross-check the ending retained earnings against the equity section of the balance sheet to ensure consistency with Total Assets and Liabilities.