Deck 7: The Income Statement: Content and Use

Question 1

The income statement's key role is to communicate ____________________ - ____________________ = ____________________ to decision users.

Answer 1

revenue; expense; net income

Question 2

The income statement summarises the results of a business' operating activities for a ____________________ accounting period.

Answer 2

specific

Question 3

_______________ _____need accounting information that lets them compare a business' actual operating performance over several years or with that of other businesses.

Answer 3

External users

Question 4

Asset, liability and owner's capital accounts are called __________________ ________ because they are used for the life of the business to record the effects of its transactions on its balance sheet.

Question 5

Expenses are the costs of providing goods and services and result in decreases in ____________________ or increases in ______________.

Question 6

________________income includes all the revenues earned and expenses incurred in the primary operating activities of a business.

Question 7

A quantity discount is a reduction in the ___________ ________of a good or service because the number of items purchased or because of a sales promotion.

Question 8

A ___________ ________is a business document listing the information for a sales return or allowance.

Question 9

A ________________ ________ system keeps a continuous record of the cost of inventory on hand and the cost of inventory sold.

Question 10

A ________________ ________ system determines the inventory at the end of each accounting period by physically counting it.

Question 11

____________________ is equal to net sales minus cost of goods sold.

Question 12

____________________ are the expenses (other than cost of goods sold) that a business incurs in its day-to-day operations.

Question 13

____________________ are the operating expenses related to the sales activity of a business.

Question 14

Expenses such as bank charges, interest expenses and bad debts are classified as ____________________ expenses.

Question 15

Investors use the income statement to help judge their return on ____________________.

Question 16

____________________ consists of calculations in which an item on the financial statements is divided by another, related item.

Question 17

The ____________________ is calculated by dividing net income by net sales.

Question 18

The ________________________ relates a business' gross profit to its net sales.

Question 19

Other ________________________ comprises items of income and expense that are not recognised in profit or loss.

Question 20

The statement of changes in equity summarises the transactions that affected ________________________ during the accounting period.

Question 21

________________ __________ are used for one accounting period to record the effects of a business' transactions on its net income.

Question 22

Closing entries are entries made by a business to transfer the ending balances from its ___________________revenue and expense accounts into its permanent account for owner's capital.

Question 23

The income statement plays a key role in the decision making of users of financial information by communicating the business' revenue, expenses and net income.

Question 24

The income statement's key role is to communicate assets - liabilities = net income to users.

Question 25

A projected income statement prepared as part of the master budget would normally be used by internal decision makers.

Question 26

The income statement summarises the results of a business' operations for a specific accounting period.

Question 27

The income statement summarises the results of a business' operations as at a specific point in time.

Question 28

Permanent accounts refer to assets, liabilities and owner's equity as they are used for the life of the business.

Question 29

Generally accepted accounting principles (GAAP) ensure all businesses calculate and publish financial information in a similar, and this comparable, manner.

Question 30

Revenues result in an increase in assets or a decrease in liabilities.

Question 31

Expenses result in increases in assets or decreases in liabilities.

Question 32

Expenses result in a decrease in assets or an increase in liabilities.

Question 33

Revenues result in decreases in assets or increases in liabilities.

Question 34

'Net sales' are sales less all selling expenses.

Question 35

Cost of goods sold is the cost of inventory that has been sold during the accounting period.

Question 36

The cost of goods sold is the sales price of inventory that has been sold.

Question 37

A business using a perpetual inventory system will always have up-to-date inventory and cost of goods sold accounts.

Question 38

A periodic inventory system requires a physical count of inventory at the end of each accounting period.

Question 39

Gross profit is the gross sales price charged for the goods sold.

Question 40

To make business decisions external users evaluate a business' risk, operating capability and financial flexibility.

Question 41

Risk is the uncertainty about the future earnings potential of a business.

Question 42

Operating capability refers to a business' ability to continue a given level of operations.

Question 43

Financial flexibility refers to a business' ability to continue a given level of operations.

Question 44

The profit margin ratio indicates the total dollars of profit from gross sales.

Question 45

Gross profit percentage is another name for profit margin.

Question 46

Withdrawals by an owner are found on the income statement as an expense.

Question 47

The income statement is important because it:

A) balances all of the assets, liabilities, and owner's equity of a business.
B) determines the cash flow of a business for the current period.
C) plays a key role in the decision-making of the business' users by communicating revenues, expenses, and net income (or net loss) for the period.
D) helps internal users determine liabilities at a specific point in time.

Question 48

The income statement reports:

A) revenues, expenses, and net income.
B) assets, liabilities, and owner's equity.
C) revenues, liabilities, and assets.
D) expenses, cash, and owner's equity.

Question 49

Asset, liability, and owner's equity accounts are:

A) temporary accounts.
B) short-term accounts.
C) long-term accounts.
D) permanent accounts.

Question 50

A revenue account is referred to as a temporary account because:

A) it relates to only one specific accounting period.
B) it only appears on the income statement.
C) once it is recorded it may be deleted.
D) it only appears on the balance sheet.

Question 51

A cash account is referred to as a permanent account because it is:

A) an asset flowing into the statement of owner's equity.
B) an asset around for the life of the business.
C) an asset with a physical presence.
D) an asset or liability permanently held in the account at the bank.

Question 52

Expenses are the cost of providing goods and services and result in:

A) increased assets or decreased liabilities.
B) decreased assets or increased liabilities.
C) decreases in both assets and liabilities.
D) increases in both assets and liabilities.

Question 53

Revenues come from sales of goods and services to customers and result in:

A) increased assets or decreased liabilities.
B) decreased assets or increased liabilities.
C) decreases in both assets and liabilities.
D) increases in both assets and liabilities.

Question 54

A business made a $500 credit sale subject to terms of 2/10, net/30. Ignoring GST, how would the receipt of cash within the discount period be recorded?

A) Increase cash and decrease accounts receivable by $500.
B) Increase cash and decrease accounts receivable by $490.
C) Increase cash by $490, decrease accounts receivable by $500, and decrease sales revenue by $10.
D) Increase cash by $490, decrease accounts receivable by $500, and increase sales revenue by $10.

Question 55

A business made a $500 credit sale subject to terms of 2/10, net/30. Ignoring GST, how would the receipt of cash, after the discount period had expired, be recorded?

A) Increase cash and decrease accounts receivable by $500.
B) Increase cash and decrease accounts receivable by $490.
C) Increase cash by $490, decrease accounts receivable by $500, and decrease sales revenue by $10.
D) Increase cash by $490, decrease accounts receivable by $500, and increase sales revenue by $10.

Question 56

A disadvantage of using the perpetual inventory system is:

A) managers have up to date information to help with day-to-day operational decisions.
B) various systems and technology can be costly.
C) inventory and cost of goods sold accounts are always up-to-date.
D) a physical count of inventory must be completed at the end of the accounting period.

Question 57

Blackstone Company uses a periodic inventory system. It had beginning inventory of $100 000, purchases of $1 300 000, and ending inventory of $125 000. What was Blackstone's cost of goods sold?

A) $1 300 000
B) $1 325 000
C) $1 275 000
D) $1 525 000

Question 58

The difference between a perpetual inventory system and a periodic inventory system is:

A) periodic will record the cost of goods sold amount at the sale.
B) perpetual requires a physical inventory count.
C) periodic will record inventory purchases in the inventory account.
D) periodic will adjust inventory at the end of each period with a physical count.

Question 59

Which of the following is a subheading under the operating expenses of an income statement?

A) Adjusting entries
B) Selling expenses
C) Cost of goods sold.
D) Gross profit.

Question 60

Operating expenses are:

A) cost of goods sold.
B) the expenses a business incurs in its day-to-day operations, other than cost of goods sold.
C) long-term expenses.
D) cost of a new plant.

Question 61

Example 7.1
The information below is used for the following problems. Jones Sales Company had:
$\begin{array}{lr}\text { Net Sales } & 200000 \\\text { Gross Profit } & 90000 \\\text { Operating Profit } & 50000 \\\text { Net Income } & 35000\end{array}$


-Refer to Example 7.1. Jones Sales Company's gross profit percentage is:

A) 25%.
B) 38%.
C) 45%.
D) 55%.

Question 62

Example 7.1
The information below is used for the following problems. Jones Sales Company had:
$\begin{array}{lr}\text { Net Sales } & 200000 \\\text { Gross Profit } & 90000 \\\text { Operating Profit } & 50000 \\\text { Net Income } & 35000\end{array}$


-Refer to Example 7.1. Jones Sales Company's profit margin is:

A) 17.5%.
B) 25%.
C) 45%.
D) 70%.

Question 63

Example 7.2
The information below is used for the following problems.
Jones & Company had:
$\begin{array}{lr}\text { Net sales } & 500000 \\\text { Gross profit } & 290000 \\\text { Operating profit } & 150000 \\\text { Net income } & 85000\end{array}$


-Refer to Example 7.2. Jones & Company's Gross Profit Percentage is:

A) 17%.
B) 30%.
C) 58%.
D) 11%

Question 64

Example 7.2
The information below is used for the following problems.
Jones & Company had:
$\begin{array}{lr}\text { Net sales } & 500000 \\\text { Gross profit } & 290000 \\\text { Operating profit } & 150000 \\\text { Net income } & 85000\end{array}$


-Refer to Example 7.2. Jones & Company's profit margin is:

A) 17%.
B) 30%.
C) 58%.
D) 69%

Question 65

Closing entries are made by the business at the end of an accounting period to:

A) create a zero balance in the revenue and expense accounts.
B) create a zero balance in the owner's capital account.
C) transfer balances from previous periods to the correct accounts
D) close off any accounts no longer used.

Question 66

What is the income statement and why is it important?

Question 67

What are the differences between sales returns and sales allowances?

Question 68

Describe a perpetual inventory system.

Question 69

What is financial flexibility and why is it important?

Question 70

What is the purpose of undertaking ratio analysis?

Question 71

How is the gross profit percentage calculated, and what does it signify?

Question 72

Explain the difference between an income statement and a statement of comprehensive income and provide some examples of items of other comprehensive income.

Question 73

What is the statement of changes in owner's equity, and why is it needed?

Question 74

What are closing entries and what is their purpose?

Question 75

Jones & Smith Company had:
$\begin{array}{ll}\text { Net sales } & 800000 \\\text { Gross profit } & 240000 \\\text { Operating profit } & 190000 \\\text { Net income } & 125000\end{array}$
a. Jones & Smith Company's gross profit percentage is:
b. Jones & Smith Company's profit margin is:

Question 76

The following information is taken from the accounting records of Bo's Bikes Limited for the current year:
$$\begin{array} { l r } \text { Administration expenses } & 120000 \\\text { Cost of goods sold } & 570000 \\\text { Selling and distribution expenses } & 220000 \\\text { Interest expense } & 50000 \\\text { Net Sales } & 1200000\end{array}$$ a. Prepare a classified income statement for Bo's Bikes.
b. Calculate the company's gross profit percentage.
c. Calculate the company's profit margin.