ACCT1101 Lecture 4: L4

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29 May 2018

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Accounting

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ACCT1101

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lOMoARcPSD|2476239

Lecture4



StatementofFinancialPerformance(incomestatement/statementofcomprehensiveincome)



Purposeoftheincomestatement:Theincomestatement:

• Allowsperiodicassessmentofprofitthroughoutthelifeofthebusiness.

• Providestimelyinformationfordecisionmaking

Withoutperiodicassessmentofprofitabusinessesusercannot:

12. Evaluatetheoutcomesofpastdecisions

13. Planforthefuture

14. Determinedistributiontoowners



Theory:

• Profit(loss)isthedifferencebetweenIncomeandExpenses

• Incomeisdefinedas"increasesineconomicbenefitsduringtheaccountingperiodinthe

formofinflowsorenhancementsofassetsordecreasesofliabilitiesthatresultinincreasesin

equity,otherthanthoserelatingtocontributionsfromequityparticipants"

• Expensesaredefinedas"decreasesineconomicbenefitsduringtheaccountingperiodin

theformofoutflowsordepletionsofassetsorincurrencesofliabilitiesthatresultin

decreasesinequity,otherthanthoserelatingtodistributiontoequityparticipants".

Income:

• Increasesinequityotherthaninvestmentsbyowners

• Twocomponents:

• Revenueisthepartofincomearisingfromordinaryrecurring(continuing)typeactivities.

• Example‐Salesrevenue,servicerevenue,interestrevenueetc.

• Gainsarethepartofincomearisingfromnon‐recurringactivities.

• Example‐gainonsaleofassetsetc.

• Theprecisewayinwhichrevenueandincomeispresentedintheincomestatementvaries

betweenbusiness,normallymainrevenuecomesfirstand"otherincome"follows.

Expenses:

CostofGoodsSold(costofsales):

• Thisisthemajorexpenseforbusinessesthatdealwithinventories.

• Itcomprisesthecostassociatedwithprovidinginventoriesthataresold.

• ForservicebusinessitisCostofServicesSupplied,suchasthecosttoabankinproviding

itsfinancialservices.

OperatingExpenses:

• Thefollowonfurtherdowntheincomestatement.

• Theycanbepresentedinvariousformats;alltogether,bynatureofbyfunction.

• Acommonformofpresentationistoclassifyasadministration,selling+distributionand

financialexpenses.

• Financialexpensesmustbeshownseparatelybylaw(financecosts)

GrossProfit:

• OperatingRevenuelessCostofGoodsSold

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lOMoARcPSD|2476239

• Notusuallyshownseparatelyoncompanyfinancialstatements.

• ReferredtoasGrossmargininthechairman'sreporti.e.grossprofitmadeonsales,often

expressedasapercentage.

• Representsthetradingperformanceofthebusinessovertheperiod.

• Thisisbasedon:

• Markupmadeongoodsold;differencebetweencostandsellingprice,thiswillvary

accordingtotheproductorservicesold.Highmarkupitems:bicyclesales(140%),elitecar

sales.Lowmarkupitems:supermarketproducts,airlinetickets.

• Levelofsalesturnovers;amountssoldofeachproduct/service

• Internalfactors;efficiences,coststructures,costcontrol

• ExternalFactors;economicconditions,marketspecifice.g.supermarketandairlineprice

wars,competitionbehaviour.

NetProfit:

• Profitafteroperatingexpensesi.e.expensesaftercostofgoodssold.

• Variations:

• Profitbeforeinterest(i.e.financecost)andtax(PBIT)

• Profitbeforetax

• Profitaftertax(PAT)

• PBITshowstheprofitsavailabletopayinteresttolenders,whichisacontractualobligation

ofthebusiness.

• PAT shows the profits remaining, which belong to the shareholders. This is added to

retainedprofitseachyearandfromwhichadividendispaid.NoPATmeansnodividend,unless

prioryearprofitsaresufficient.

• MaximisationofPATisviewedasthekeyobjectiveofthebusiness.

IncomeStatementFrequency

Incomestatementsarenormallypreparedonanannualbasis,howeveritiscommonfor

shorterperiodstobeadopted.

• "Interimreporting"e.g.halfyearly.quarterlyormonthlyreports.

• Providesmorefrequentfeedbackonperformanceforinternalmanagementusei.e.budget

• Moretimelyinformationfordecisionmaking

• RequiredbyASXforlistedcompanies.IncomeStatementformatandtheprofit

andlossequationFormatoftheincomestatementdependson:

• Structureoftheentity(proprietorship,partnershipandcompany)

• Natureofbusinessactivity(Merchandising,manufacturing,service)

AllincomestatementsworkonthebasisoftheProfitandlossequation:revenue

‐expense=profit



Format:

• Alistingofincomeandexpenses

• Differenceshownasprofitorloss

• Expensesinorderofsizeoralphabetically.



Foralargerbusinessincomeandexpensesareclassifiedintomeaningfulcategoriesdetermined

bymanagement

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Related Questions

1. Which statement is normally prepared first? (Points : 3) Income statement Balance sheet Statement of cash flows Retained earnings statement2. When a business borrows money, it incurs a(n) (Points : 3) tax. liability. cash payment. all of these.3. More than 70% of businesses are organized as what type of business? (Points : 3) Not-for-profit Corporation Partnership Sole proprietorship4. Brennan, Inc. had revenues of $234,000, expenses of $175,000, and dividends of $40,000 during 2009. Which of the following statements is correct? (Points : 3) Net income for 2009 totaled $19,000. Net income for 2009 totaled $59,000. Total retained earnings increased by $59,000 during 2009. Total retained earnings decreased by $40,000 during 2009.5. The statement of cash flows is integrated with the balance sheet because (Points : 3) the cash at the beginning of the period plus or minus the cash flows from operating, investing, and financing activities equals the end of period cash reported on the balance sheet. the cash at the beginning of the period plus or minus the net income equals the end of period cash reported on the balance sheet. the cash at the beginning of the period plus or minus assets and liabilities equals the end of period cash reported on the balance sheet. the cash at the beginning of the period plus or minus the cash flows from operating activities equals the end of period cash reported on the balance sheet.6. The basic financial statements do NOT include the (Points : 3) income statement. tax return balance sheet. statement of cash flows.7. A __________ is an economic event that under generally accepted accounting principles affects an element of the financial statements and must be recorded. (Points : 3) framework control set of rules transaction8. The payment of a liability (Points : 3) decreases assets and stockholders' equity. increases assets and decreases liabilities. decreases assets and increases liabilities. decreases assets and decreases liabilities. 9. Co. received $1,000 from Newbie as rent for the use of a building owned by UNI. How does this transaction affect UNI's accounts if UNI recognizes a liability? (Points : 3) Cash is increased and revenue is increased. Cash is increased and revenue is decreased. Cash is increased and unearned revenue is increased. It is not recorded.10. Depreciation Expense and Accumulated Depreciation are classified, respectively, as (Points : 3) expense and contra asset. asset and contra liability. revenue and asset. contra asset and expense.11. Deferred expenses (prepaid expenses) are items initially recorded as assets but are expected to become __________ over time. (Points : 3) Liabilities Assets stockholders%u2019 equity Expenses12. A&M Co. provided services of $1,000,000 to clients on account. How does this transaction affect A&M%u2019s accounts? (Points : 3) Increase accounts receivable and cash by $1,000,000 each Increase accounts receivable and revenues by $1,000,000 each Increase accounts receivable and unearned revenues by $1,000,000 each No effect at this time13. Multiple-step income statements show: (Points : 3) gross profit but not income from operations. neither gross profit nor income from operations. both gross profit and income from operations. income from operations but not gross profit.14. Since merchandise inventory is normally sold within a year, how is it reported on the balance sheet? (Points : 3) As a revenue As the cost of merchandise sold It does not appear on the Balance Sheet As a current asset15. The credit terms of a sale are normally indicated on a(n) (Points : 3) purchase order. invoice. bill of lading. account receivable.16. Inventory shortage is recorded when (Points : 3) merchandise is returned by a buyer. merchandise purchased from a seller is incomplete or short. merchandise is returned to a seller. there is a difference between a physical count of inventory and inventory records. 17. The bank reconciliation (Points : 3) should be prepared by an employee who records cash transactions. is part of the internal control system. is for information purposes only. is sent to the bank for verification.18. A special cash fund used to make small payments that occur frequently is called a(n) (Points : 3) operating expenses fund. change fund. market fund. petty cash fund.19. The objectives of internal control are to (Points : 3) control the internal organization of the accounting department personnel and equipment. provide reasonable assurance that assets are safeguarded, information is processed accurately, and laws and regulations are complied with. prevent fraud and promote the social interest of the company. provide control over %u201Cinternal-use only%u201D reports and employee internal conduct.20. When a firm uses internal auditors, it is adhering to which of the following internal control elements? (Points : 3) Risk assessment Proofs and security measures Monitoring Separating responsibilities for related operations21. What type of account is Allowance for Doubtful Accounts? (Points : 3) Contra asset Asset Revenue Expense22. Merchandise inventory is reported on the balance sheet in the section entitled (Points : 3) current assets. fixed assets. current liabilities. stockholders' equity.23. Receivables are usually a significant portion of (Points : 3) total current liabilities. total liabilities. total current assets. total assets.24. The inventory data for an item for November are: Nov.1 Inventory 25 units at $20 10 Purchased 30 units at $21 30 Purchased 10 units at $22 Sold 35 unitsUsing the first-in, first-out method, what is the cost of the merchandise inventory of 30 units on November 30? (Points : 3) $640 $605 $623 $66025. All amounts paid to get an asset in place and ready for use are referred to as (Points : 3) capital expenditures. revenue expenditures. residual value. cost of an asset.26. Fixed assets are ordinarily presented in the balance sheet (Points : 3) at current market values. at replacement costs. at cost less accumulated depreciation. in a separate section along with intangible assets.27. Goodwill is (Points : 3) amortized similar to other intangibles. only written down if an impairment in value occurs. charged to expense immediately. amortized over 40 years or its economic life, whichever is shorter.28. If a capital expenditure is treated as a revenue expenditure, then (Points : 3) expenses are overstated and owners' equity is understated. expenses are overstated and assets are overstated. expenses are understated and owners' equity is overstated. net income is overstated and owners' equity is understated.29. A bond indenture is (Points : 3) a contract between the corporation issuing the bonds and the underwriters selling the bonds. the amount due at the maturity date of the bonds. a contract between the corporation issuing the bonds and the bondholders. the amount for which the corporation can buy back the bonds prior to the maturity date.30. Gross earnings for a payroll period less payroll deductions are referred to as (Points : 3) overtime pay. bonus pay. gross pay. net pay.31. How is treasury stock shown on the balance sheet? (Points : 3) As an asset As a decrease in stockholders' equity As an increase in stockholders' equity Treasury stock is not shown on the balance sheet.32. Current liabilities are (Points : 3) due but not receivable for more than one year. due but not payable for more than one year. due and receivable within one year. due and payable within one year.33. The total earnings of an employee for a payroll period are referred to as (Points : 3) take-home pay. pay net of taxes. net pay. gross pay.34. Where is interest expense listed on the income statement? (Points : 3) Other expense section Cost of merchandise sold Operating expenses Interest expense is on the balance sheet, not the income statement.35. A corporation has 50,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be (Points : 3) 200,000 shares. 50,000 shares. 250,000 shares. 12,500 shares.

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QUESTION 1

The ownership of a corporation is represented by:

		shares of stock.
		the owner's capital account.
		the revenue account.
		cash in bank account.

QUESTION 2

How many classifications does a Capital Stock Account have?

		One
		Two
		Three
		Four

QUESTION 3

The equity contributed by stockholders and equity earned throughbusiness profits represent the stockholders' equity for a:

		partnership firm.
		sole proprietorship.
		corporation.
		none of these.

QUESTION 4

Retained earnings are a part of a/an:

		asset account.
		permanent account.
		stockholders' equity account.
		temporary account.

QUESTION 5

How many sections does an Income Statement have?

		Two
		Three
		Four
		Five

QUESTION 6

Net sales are related to the:

		net income section.
		gross profit on sales section.
		revenue section.
		cost of merchandise sold section.

QUESTION 7

Sales discount and sales return and allowance are:

		revenue accounts.
		contra revenue accounts.
		permanent accounts.
		contra expenses accounts.

QUESTION 8

The total cost related to merchandise purchases during anaccounting period is the:

		net purchase.
		cost of merchandise sold.
		cost of merchandise available for sale.
		beginning merchandise inventory.

QUESTION 9

The gross profit on sale is $65,000, and operating expenses is$35,000. What will be the operating profit?

		$65,000
		$35,000
		$100,000
		$30,000

QUESTION 10

A balance sheet has the following sections:

		Assets, liabilities, and stockholders' equity.
		Income, expenses, and stockholders' equity.
		Assets, liabilities, and income.
		Operating income, operating expenses, and stockholders'equity.

QUESTION 11

A cash flow statement is used to assess the:

		net increase or decrease of cash.
		net increases of cash only.
		net decrease of cash only.
		net profit or loss of business.

Statement of Cash Flows Using a Work SheetâIndirect Method (Appendix)

Peoria Corp. just completed another successful year, as indicated by the following income statement:

	For the Year Ended December 31, 2017

Sales revenue	$1,250,000
Cost of goods sold	700,000
Gross profit	$550,000
Operating expenses	150,000
Income before interest and taxes	$400,000
Interest expense	25,000
Income before taxes	$375,000
Income tax expense	150,000
Net income	$225,000

Presented here are comparative balance sheets:

	December 31
	2017	2016

Cash	$52,000	$90,000
Accounts receivable	180,000	130,000
Inventory	230,000	200,000
Prepayments	15,000	25,000
Total current assets	$477,000	$445,000
Land	$750,000	$600,000
Plant and equipment	700,000	500,000
Accumulated depreciation	(250,000)	(200,000)
Total long-term assets	$1,200,000	$900,000
Total assets	$1,677,000	$1,345,000
Accounts payable	$130,000	$148,000
Other accrued liabilities	68,000	63,000
Income taxes payable	90,000	110,000
Total current liabilities	$288,000	$321,000
Long-term bank loan payable	$350,000	$300,000
Common stock	$550,000	$400,000
Retained earnings	489,000	324,000
Total stockholders' equity	$1,039,000	$724,000
Total liabilities and stockholders' equity	$1,677,000	$1,345,000

Other information is as follows:

Dividends of $60,000 were declared and paid during the year.

Operating expenses include $50,000 of depreciation.

Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.

The president has asked you some questions about the year's results. She is very impressed with the profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $50,000.

Required:

1. Using the format in the chapter's appendix, prepare a statement of cash flows work sheet. If an amount box does not require an entry, leave it blank. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.

	Balances			Cash Inflows (Outflows)
Accounts	12/31/17	12/31/16	Changes	Operating	Investing	Financing
Cash	$	$	$	$	$	$
Accounts Receivable
Inventory
Prepayments
Land
Plant and Equipment
Accumulated Depreciation
Accounts Payable
Other Accrued Liabilities
Income Taxes Payable
Long-Term Bank Loan Payable
Common Stock
Retained Earnings
Net Income
Totals	$	$	$	$	$	$
Net increase (decrease) in cash				$

2. Prepare a statement of cash flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.

Peoria Corp.
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flows from Operating Activities
	$
Adjustments to reconcile net income to net cash provided by operating activities:







	$
Cash Flows from Investing Activities
	$

	$
Cash Flows from Financing Activities
	$


	$
	$
Cash balance, December 31, 2016
Cash balance, December 31, 2017	$

3. During the year Peoria experienced a decrease in cash at the end of the year due to

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