Questions and Answers
A balance sheet has three sections: heading, assets, and liabilities.
False
The owner's capital amount reported on a balance sheet is calculated as: capital account balance plus drawing account balance less net income.
False
The formula for calculating net income is: total revenue minus total expenses equals net income.
True
The net income calculated for the income statement and the net income on the work sheet must be the same.
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The Adequate Disclosure accounting concept is applied when financial statements contain all information necessary to understand a business's financial condition.
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On an income statement, double lines are ruled across both amount columns to indicate that debits equal credits.
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For a service business, the revenue reported on an income statement includes components for total expenses and net income.
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The formula for calculating the total expenses component percentage is: total expenses divided by total sales equals total expenses component percentage.
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The financial condition of a business refers to its financial strength.
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The current capital to be reported on a balance sheet is calculated as: the capital account balance plus net income equals current capital.
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The owner's equity section of a balance sheet may report different kinds of details about owner's equity, depending on the need of the business.
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Component percentages on an income statement are calculated by dividing sales and total expenses by net income.
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A component percentage is the percentage relationship between one financial statement item and the total that includes that item.
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An income statement reports information over a period of time, indicating the financial progress of a business in earning a net income or net loss.
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The Matching Expenses with Revenue accounting concept is applied when the revenue earned and the expenses incurred to earn that revenue are reported in the same fiscal period.
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Information needed to prepare an income statement comes from the trial balance columns and the income statement columns of a work sheet.
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An amount written in parentheses on a financial statement indicates an estimate.
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A balance sheet reports financial information over a specific period of time.
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A balance sheet reports financial information on a specific date and includes the assets, liabilities, and owner's equity.
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When a business has two different sources of revenue, a separate income statement should be prepared for each kind of revenue.
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What is the date on a monthly income statement prepared on July 31?
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What indicates that the amount of net income calculated on an income statement is correct?
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Preparing financial statements at the end of each monthly fiscal period is an application of which accounting concept?
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What is the source for information needed to prepare an income statement's revenue section?
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What does a balance sheet report about a business?
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Where is the amount of owner's capital calculated from when preparing a balance sheet?
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What is the formula for calculating the net income component percentage?
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What information is needed to prepare a balance sheet liabilities section?
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What accounting concept ensures that financial statements contain all necessary information?
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Study Notes
Balance Sheet Fundamentals
- A balance sheet includes three sections: heading, assets, and liabilities.
- It reports a business's financial condition on a specific date, detailing assets, liabilities, and owner's equity.
Income Statement Insights
- Net income is calculated as total revenue minus total expenses.
- The income statement reflects the financial progress of a business over a period, indicating net income or loss.
- For service businesses, revenue reported includes total expenses and net income.
Accounting Concepts
- The Adequate Disclosure concept ensures financial statements contain all necessary information for understanding financial conditions.
- The Matching Expenses with Revenue concept applies when both earned revenue and incurred expenses are reported in the same fiscal period.
- The Accounting Period Cycle mandates preparing financial statements at the end of each monthly fiscal period.
Owner's Equity and Capital
- Owner's equity details may vary on a balance sheet depending on the business's needs.
- Current capital is incorrectly calculated as the capital account balance plus net income; this statement is false.
- Owner's capital is computed using values from the balance sheet columns of a worksheet.
Component Percentages
- Component percentages express the relationship between individual financial statement items and their totals.
- The formula for calculating total expenses component percentage involves dividing total expenses by total sales.
Financial Statement Preparation
- Information for preparing an income statement's revenue section comes from the worksheet's Account Title column and the Income Statement Credit Column.
- When preparing balance sheets, data for the liabilities section is obtained from the Account Title column and the Balance Sheet Credit column.
Miscellaneous Facts
- Parentheses in financial statements do not indicate estimates.
- Financial statements do not report information over a specific period, unlike the income statement.
- Separate income statements for different revenue sources are unnecessary; one can suffice for combined reporting.
Studying That Suits You
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Description
Test your knowledge of key concepts in accounting with these flashcards from Chapter 7. This quiz covers balance sheets, capital calculations, and net income formulas to reinforce your understanding. Perfect for students preparing for exams or needing a quick review.
