Questions and Answers
A balance sheet reports financial information over a specific period of time.
False
The work sheet is used to assist in preparing the revenue, expenses, and net income sections of an income statement.
True
The formula for calculating the total expenses component percentage is: total expenses divided by total sales equals total expenses component percentage.
True
Single lines ruled across an amount column of an income statement indicate that amounts are to be added.
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The net income on an income statement is verified by checking the balance sheet.
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The financial condition of a business refers to its financial strength.
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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 Matching Expenses with Revenue accounting concept is applied when the revenue earned and the expense incurred to earn that revenue are reported in the same fiscal period.
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When a business has two different sources of revenue, a separate income statement should be prepared for every kind of revenue.
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Amounts from a work sheet's Income Statement Debit column are used in preparing the expense section of an income statement.
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A balance sheet reports information about the elements of the accounting equation.
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The net income calculated for the income statement and the net income on the work sheet must be the same.
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On a balance sheet, double lines are ruled across both amount columns to indicate that debits equal credits.
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An amount written in parentheses on a financial statement indicates an estimate.
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The Adequate Disclosure accounting concept is applied when financial statements contain all information necessary to understand a business's financial conditions.
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Amounts from a work sheet's Trial Balance columns are used in preparing the revenue section of an income statement.
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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 a net loss.
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Information needed to prepare the assets section of the balance sheet is obtained from the work sheet's Account Title column and the Balance Sheet Credit column.
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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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The income statement for a service business has five sections: heading, revenue, expenses, net income or loss, and capital.
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Information needed to prepare a balance sheet liabilities section is obtained from a work sheet's Account Title column and __.
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Information needed to prepare an income statement's revenue section is obtained from a work sheet's Account Title column and __.
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Information needed to prepare an income statement's expense section is obtained from a work sheet's Account Title column and __.
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The formula for calculating the total expenses component percentage is __.
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The sections of an income statement are __.
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The date on a monthly income statement prepared on July 31 is written as __.
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Assuring that financial statements contain all information necessary to understand a business's financial condition is an application of the accounting concept __.
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When preparing a balance sheet, the amount of owner's capital is calculated using amounts obtained from __.
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Information needed to prepare a balance sheet assets section is obtained from a work sheet's Account Title column and __.
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An income statement reports a business's financial __.
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The formula for calculating the net income component percentage is __.
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A balance sheet reports a business's financial __.
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Preparing financial statements at the end of each monthly fiscal period is an application of the accounting concept __.
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The amount of net income calculated on an income statement is correct if __.
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The percentage relationship between one financial statement item and the total that includes that item is __.
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Study Notes
Balance Sheet
- Reports a business's financial condition as of a specific date.
- Does not cover financial information over a period of time; that's the function of the income statement.
- Double lines in the amounts columns indicate debits equal credits.
Income Statement
- Indicates financial progress in earning a net income or loss over a specific period.
- Contains key sections: heading, revenue, expenses, and net income (or loss).
- Revenue for service businesses includes total expenses and net income.
- The formula for calculating net income component percentage: net income divided by total sales.
Accounting Concepts
- Matching Expenses with Revenue: Applies when revenues earned and related expenses are reported in the same fiscal period.
- Adequate Disclosure: Ensures all necessary information is included in financial statements for understanding a business's financial condition.
- Accounting Period Cycle: Involves preparing financial statements at the end of each monthly fiscal period.
Worksheet Usage
- The worksheet aids in preparing sections of an income statement including revenue, expenses, and net income.
- Information for the income statement's expense section comes from the Income Statement Debit column of the worksheet.
- Assets section information is sourced from the Worksheet's Balance Sheet Debit column.
Financial Ratios
- Total expenses component percentage is calculated as total expenses divided by total sales.
- Component percentages show the relationship between financial statement items and their total.
Verification and Accuracy
- Net income on an income statement and net income on the worksheet must be the same for accuracy.
- The amount of owner's capital in a balance sheet is calculated from the worksheet's Balance Sheet columns.
Common Misunderstandings
- Different sources of revenue do not require separate income statements; a single income statement can adequately report multiple revenue types.
- Parentheses on financial statements indicate negative amounts, not estimates.
- The sections or components of an income statement do not include a capital section.
Presentation
- Monthly income statement dates are formatted as "For Month Ended [date], [year]."
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Test your knowledge of key concepts from Chapter 7 in Accounting with these flashcards. Each card presents essential terminology and definitions that are crucial for understanding balance sheets and income statements.
