Questions and Answers
The Full Disclosure accounting concept is applied when a company always prepares financial statements at the end of each monthly fiscal period.
False
Internal users of accounting information include company managers, officers, and creditors.
False
An income statement reports information on a specific date, indicating the financial condition of a business.
False
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 Account Title column and the Income Statement columns of a work sheet.
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The income statement for a service business has five sections: heading, Revenue, Expenses, Net Income or Net Loss, and Capital.
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The income statement's account balances are obtained from the work sheet's Income Statement columns.
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The net income on an income statement is verified by checking the balance sheet.
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Double lines ruled across both amount columns of an income statement indicate that the amount has been verified.
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A financial ratio is a comparison between two components of financial information.
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Financial ratios on an income statement are calculated by dividing sales and total expenses by net income.
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No company should have a vertical analysis ratio for total expenses higher than 48.0%.
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When a business has two different sources of revenue, both revenue accounts are listed on the income statement.
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An amount written in parentheses on a financial statement indicates a negative amount.
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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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A balance sheet reports information about the elements of the accounting equation.
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The owner's capital amount reported on a balance sheet is calculated as: capital account balance plus drawing account balance less net income.
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The position of the total asset line on the balance sheet is determined after the Equities section is prepared.
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Double lines are ruled across the balance sheet columns to show that the column totals have been verified as correct.
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The Owner's Equity section of a balance sheet is the same for all businesses.
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What is the date of the income statement?
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What is the heading of the expenses section?
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What is the statement name?
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What is the expenses account title?
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What is the expenses account balance?
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What is the amount of net income or loss?
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What is the heading of the revenue section?
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What is the net income ratio (or return on sale)?
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What is the revenue account title?
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What are the words Total Expenses?
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What is the business name?
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What is the total amount of revenue?
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What is the total amount of expenses?
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What are the words net income or net loss?
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What is the total expenses ratio?
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Study Notes
Accounting Concepts
- Full Disclosure accounting concept does not mandate monthly financial statements.
- Internal users of accounting information typically refer to company managers and officers, not creditors.
- An income statement reflects a period’s performance, not a specific date; this indicates a business's financial condition.
Income Statement Details
- Matching Expenses with Revenue concept ensures that earned revenue and related expenses are reported within the same fiscal period.
- Income statement preparation involves using data from the Account Title column and Income Statement columns of a work sheet.
- The income statement for service businesses comprises heading, Revenue, Expenses, and Net Income or Net Loss; it does not include Capital.
- Account balances in the income statement come from the work sheet's Income Statement columns.
Financial Statement Verification
- Verifying net income should not be done via the balance sheet.
- Double lines across income statement columns signify that amounts have been verified.
- Financial ratios serve as comparisons between components of financial data.
Financial Ratios
- Income statement financial ratios are inaccurately calculated if dividing sales and total expenses by net income.
- Companies may have varying vertical analysis ratios for total expenses, with no fixed maximum percentage.
Revenue Reporting
- Multiple revenue sources must be individually listed on the income statement.
- Parentheses in financial statements indicate negative amounts.
Balance Sheet Overview
- A balance sheet presents financial information as of a specific date, encompassing assets, liabilities, and owner's equity.
- It conveys details about the elements of the accounting equation.
- The owner's capital on a balance sheet is not calculated by adding the drawing account balance to net income.
Balance Sheet Structure
- The total asset line's position is established post-preparation of the Equities section.
- Double lines across balance sheet columns confirm that totals have been verified.
Owner's Equity Clarification
- The Owner's Equity section varies among businesses and is not universally identical.
Income Statement Components (Part 2)
- Components of an income statement include the date, heading of expenses, statement name, expense account titles, and revenue account titles.
- Net income or loss amounts and ratios, total expenses, business name, and revenue totals are also key inclusions on the statement.
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Description
Test your knowledge with this flashcard quiz on Accounting Chapter 7. Explore key concepts and definitions that shape financial reporting and the role of internal users. Perfect for students preparing for exams.
