Accounting Chapter 3 Flashcards

Questions and Answers

What are operating activities?

Only buying goods.

Financing activities.

Infrequent investment activities.

Day-to-day functions involved in running a business. (correct)

What is the operating cycle?

The period from buying goods and services through to collecting cash from customers.

What does the income statement summarize?

The financial impact of operating activities during the accounting period.

What are revenues?

The amounts a business charges its customers for goods or services. Signup and view all the answers

What are expenses?

Costs incurred to generate revenues in the period covered by the income statement. Signup and view all the answers

How is net income calculated?

By subtracting expenses from revenues. Signup and view all the answers

What does the Time Period Assumption allow?

The long life of a company to be reported in shorter time periods. Signup and view all the answers

Which financial statement reports the financial effects of activities only during the current period?

Income Statement Signup and view all the answers

What is cash basis accounting?

Recording revenues when cash is received and expenses when cash is paid. Signup and view all the answers

What is accrual basis accounting?

Recording revenues when earned and expenses when incurred. Signup and view all the answers

What are the two basic accounting principles under accrual basis accounting?

Revenue recognition and expense recognition principles. Signup and view all the answers

What does the revenue recognition principle state?

Revenues should be recognized when they are earned. Signup and view all the answers

What is unearned revenue?

Liability representing obligations to provide goods/services in the future. Signup and view all the answers

What is accounts receivable?

The right to collect cash in the future from customers. Signup and view all the answers

What is the expense recognition principle (or 'matching')?

Expenses are recognized in the same period as the revenues they relate to. Signup and view all the answers

What is the difference between the timing of reporting expenses and cash payments?

Expenses are recognized based on business activity timing, not cash payment timing. Signup and view all the answers

What is accounts payable?

A liability representing obligations to pay for goods or services received. Signup and view all the answers

What is the purpose of a trial balance?

To ensure total debits equal total credits. Signup and view all the answers

How is net profit margin calculated?

Net Profit Margin = Net Income / Total Revenue. Signup and view all the answers

Study Notes

Operating Activities

Daily functions that sustain business operations; regular and short-term impact compared to infrequent investing and financing activities.
Key components include purchasing goods/services and selling them, alongside cash collection.

Operating Cycle

Timeframe from acquiring goods/services until cash is collected from customers.

Income Statement Accounts

Summarizes financial outcomes of operating activities for an accounting period.
Comprises three sections: revenues, expenses, and net income.

Revenues

Amounts charged to customers for goods/services provided.
Reported first in the income statement.

Expenses

Costs incurred to operate the business and generate revenues.
Recognized when resources are used, regardless of payment timing, and reported after revenues.

Net Income

Result of subtracting expenses from revenues.
A key indicator of financial performance; termed net loss if expenses exceed revenues.

Time Period Assumption

Allows for reporting on a company's long-term operations in shorter intervals.

Balance Sheet vs Income Statement

Income statement reflects activities of the current period with temporary accounts; balance sheet accounts are permanent and have ongoing effects.

Cash Basis Accounting

Records revenues upon cash receipt and expenses when cash is paid.

Accrual Basis Accounting

Records revenues when earned and expenses when incurred, unaffected by cash timing.
Emphasizes actual occurrence of business activities over cash flow.

Revenue Recognition Principle

Revenues recognized when obligations to customers are fulfilled, typically at delivery.

Timing of Reporting Revenue vs Cash Receipts

Revenue recognition is dependent on service provision, not cash timing; cash can be received concurrently, before, or after services are rendered.

Unearned Revenue

Liability indicating obligation to deliver goods/services post payment.

Accounts Receivable

Asset reflecting rights to collect cash from customers when goods/services are provided on credit.

Expense Recognition Principle ("Matching")

Aligns expense recording with associated revenue periods, ensuring accurate financial reporting.

Timing of Reporting Expenses vs Cash Payments

Expense recognition tied to business activities, independent of cash payment timing.

Accounts Payable

Liability for costs incurred but not yet paid, reflecting unpaid wages as an example.

Stockholders' Equity

Represents claims of owners on company resources, sourced from contributed capital and retained earnings.

Retained Earnings Subcategories

Includes revenues and expenses, which flow into retained earnings but are initially recorded separately for clarity.

Expanded Debit/Credit Framework

Revenues credited to increase stockholders' equity; expenses debited reduce net income and retained earnings.

Trial Balance

Internal report to verify equality of total debits and credits; lists all account balances organized by category.

Net Profit Margin

Indicates profit earned per revenue dollar; calculated as Net Income divided by Total Revenue.
Example: Pizza Aroma's net income of $6,400 from $15,500 revenue gives a net profit margin of approximately 41.3%.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Dive into the essentials of the Income Statement with these flashcards focused on operating activities. Learn key terms and concepts that form the backbone of business operations as you study the daily functions that influence financial performance.