ACC 201 Lecture Notes - Lecture 2: Gross Margin, Net Income, Income Statement

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26 Aug 2019

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C h a p t e r 1. Process of identifying, measuring, recording, and communicating financial information about a company"s business activities so decision makers can make informed decisions. The income statement consists of two major elements: Revenues are the increase in assets that result from the sale of products or services. Revenue includes: sales or service revenue; interest or dividend income, gains. Expenses are the cost of resources used to earn revenues during a period. Expenses include: cost of goods sold; selling, general and administrative expenses; research and development expense; losses; income taxes expense. Net income = revenues expenses: multiple-step income statements. Gross margin (gross profit)= net sales cogs. Income from operations = gross margin operating expenses. Net income = income from operations (nonoperating revenues expenses) The retained earnings statement summarizes and explains the changes in retained earnings during the accounting period. over a period of time. Dividends is not on our balance sheet it only a ects res.

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1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

"Y" Company began the accounting period with $60,000 of merchandise, and net cost of purchases was $240,000. A physical inventory showed $72,000 of merchandise unsold at the end of the period. The cost of goods sold of Y Company for the period is:

Select one:

a. $300,000.

b. $228,000.

c. $252,000.

d. $168,000.

e. None of the above.

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A business purchased merchandise for $12,000 on account; terms are 2/10, n/30. If $2,000 of the merchandise was returned and the remaining amount due was paid within the discount period, the purchase discount would be:

Select one:

a. $1,200.

b. $200.

c. $240.

d. $1,000.

e. $3,600.

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On a sales invoice, "2/10, n/30" means

Select one:

a. Pay the invoice by February 10, or November 30th.

b. If paid within 2 days, take a cash discount of 10%. Otherwise, the full amount is due within 30 days.

c. Nothing. Things like that are usually typos.

d. If paid within 10 days, take a cash discount of 2%. Otherwise, the full amount is due within 30 days.

e. Pay for two items within 10 days, and the remaining items (n) within 30 days.

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The major differences between unclassified and classified income statements are

Select one:

a. A classified income statement only has two categoriesârevenues and expenses. An unclassified income statement divides both revenues and expenses into operating and non-operating items.

b. An unclassified income statement is made available to the public, while a classified income statement is private.

c. None of these.

d. An unclassified income statement only has two categoriesârevenues and expenses. A classified income statement divides both revenues and expenses into operating and non-operating items.

e. There is no real difference. The terminology depends upon the company's industry classification.

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Gross margin percentage is calculated by

Select one:

a. (Gross margin divided by Net inventory turnover)*100.

b. None of these.

c. (Net cost of sales divided by Net Sales)*100.

d. (Gross margin divided by Net sales)*200

e. ((Gross margin minus non-operating expenses) divided by Gross Sales).

amberwasp977

Hands-On Project 10-12

IMPROVING DECISION MAKING: USING SPREADSHEET SOFTWARE TO ANALYZEA DOT- COM BUSINESS

Software skills: Spreadsheet downloading, formatting, andformulas

Business skills: Financial statement analysis 10- 12

Pick one e- commerce company on the Internetâ for example,Ashford, Buy. com, Yahoo, or Priceline. Study the Web pages thatdescribe the company and explain its purpose and structure. Use theWeb to find articles that comment on the company. Then visit theSecurities and Exchange Commissionâs Web site at www. sec.gov to access the companyâs 10- K ( annual report) formshowing income statements and balance sheets. Select only thesections of the 10- K form containing the desired portions offinancial statements that you need to examine, and download theminto your spreadsheet. Instructions below provide more detailedinstructions on how to download this 10- K data into a spreadsheetand information on financial statements. Create simplifiedspreadsheets of the companyâs balance sheets and income statementsfor the past three years.

â¢ Is the company a dot- com success, borderline business, orfailure? What information provides the basis of your decision? Why?When answering these questions, pay special attention to thecompanyâs three- year trends in revenues, costs of sales, grossmargins, operating expenses, and net margins.

â¢ Prepare a PowerPoint overhead presentation (with a minimum offive slides), including appropriate spreadsheets or charts, andpresent your work to your professor and classmates. An examplePowerPoint slide presentation is attached for your review in thislearning module folder in Blackboard.

As needed: Students can find material on understanding financialstatements on financial Web sites such as Ameritrade(www.ameritrade.com) or the Small Business Knowledge Basehttp://www.bizmove.com/finance/m3b2.htm.

Downloading the Data into a Spreadsheet

Use the Convert Text to Columns Wizard in your spreadsheetsoftware to arrange the 10-K data you downloaded into spreadsheetcolumns and rows. From the Excel menu, select Data and then selectthe Text to Columns option. The software brings up a Wizard toconvert the imported text into spreadsheet columns. Although youcan decide to create line breaks, it may be easiest to accept thedefault settings (Fixed Width, General format) and then adjustcolumn widths after the Wizard has arranged the data in spreadsheetcolumns.

Financial Statements

Financial statements are used to evaluate the performance of abusiness and diagnose its strengths and weaknesses. The two primaryfinancial statements are income statements and balance sheets. Theincome statement, also called an operating statement or profit andloss statement, shows the income and expenses of a firm over aperiod of time, such as a year, a quarter, or a month. Gross profitis calculated by subtracting the cost of goods sold from revenues,or sales. The gross margin is calculated by dividing gross profitby revenues (or sales). Net profit (or loss) is calculated bysubtracting all other expenses, including operating expenses andincome taxes from gross profit. Operating expenses are all businesscosts (such as expenditures for sales and marketing, general andadministrative expenditures, and depreciation) other than thoseincluded in the cost of goods sold. Net margins arecalculated by dividing net profit (or loss) by revenues (orsales).

A balance sheet provides a snapshot of a companyâs financialassets and liabilities on a given date, usually the close of anaccounting period. It lists what material andintangible assets the business owns and what money the businessowes either to its creditors (liabilities) or to its owners(shareholdersâ equity, also known as net worth). At any given timea businessâs assets equals the sum of its liabilities plus its networth. Current assets include cash, securities, accountsreceivable, or other investments that are likely to be convertedinto cash within one year. Liabilities are outstanding obligationsof the firm. Current liabilities are debts that are due within oneyear. Long-term debt consists of liabilities that are not due untilafter a year or more. If too much debt has been used to finance thefirmâs operations, problems may arise in meeting future interestpayments and repaying outstanding loans. By examining a series ofbalance sheets, one can identify and analyze trends in thefinancial strength of a business.

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ACC 201 Lecture Notes - Lecture 2: Gross Margin, Net Income, Income Statement

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