Questions and Answers
For a service business, the revenue reported on an income statement is often compared to two items: total expenses and net income.
True
The net income calculated for the income statement and the net income on the work sheet can be different because of adjusting entries.
False
An amount written in parentheses on a financial statement indicates an estimate.
False
The formula for calculating the net income ratio is net income divided by total sales.
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The area of accounting that focuses on reporting information to internal users is called managerial accounting.
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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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The Owner's Equity section of a balance sheet may report different kinds of details about owner's equity, depending on the needs of the business.
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If a business has a net loss for the period, expenses should be reported before revenues on the income statement.
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The owner's capital amount reported on a balance sheet is calculated as capital account balance less drawing account balance plus net income.
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The area of accounting that focuses on reporting information to external users is called managerial accounting.
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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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The formula for calculating the total expenses ratio is total expenses divided by net income.
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A financial ratio is a comparison between two components of financial information.
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The calculation and interpretation of a financial ratio is called ratio analysis.
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A balance sheet reports financial information for a specific date.
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An income statement reports information for a specific date indicating the financial progress of a business in earning a net income or a net loss.
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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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Vertical analysis is reporting an amount on a financial statement as a percentage of another item on the same financial statement.
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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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Return on sales (ROS) is the ratio of net income to total sales.
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Study Notes
Accounting Concepts and Practices
- Revenue for a service business is compared on the income statement to total expenses and net income.
- Differences in net income between the income statement and the worksheet may occur due to adjusting entries.
- Parentheses on financial statements do not indicate estimates; this is a misconception.
- Net income ratio is calculated as net income divided by total sales, a key performance metric.
- Managerial accounting focuses on internal reporting for decision-making within the business.
- It is not necessary to prepare separate income statements for different sources of revenue.
- The Owner's Equity section of the balance sheet provides detailed insights on owner's equity based on business needs.
- In the case of a net loss, revenues are reported before expenses on the income statement.
- The owner's capital on a balance sheet is derived from the capital account balance, less withdrawals, plus net income.
- Managerial accounting is distinct from the area that reports information to external users, which is financial accounting.
- A balance sheet presents a snapshot of financial information, including assets, liabilities, and owner's equity, for a specific date.
- The total expenses ratio is incorrectly defined; it should be total expenses divided by total revenue.
- A financial ratio facilitates the comparison between two financial figures, aiding financial analysis.
- Ratio analysis includes the calculation and interpretation of financial ratios to assess performance.
- A balance sheet specifically reports financial information for a particular date, contrasting with income statements.
- Income statements cover a period's financial results, indicating net income or loss, not tied to a single date.
- The Adequate Disclosure concept ensures financial statements provide all necessary information for understanding a business's financial status.
- Vertical analysis shows each amount on a financial statement as a percentage of another amount on the same statement, aiding comparisons.
- The Matching Expenses with Revenue concept ensures that revenue earned and related expenses are reported in the same fiscal period for accurate profit measurement.
- Return on Sales (ROS) is defined as the ratio of net income to total sales, reflecting operational efficiency.
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Description
Test your understanding of key accounting concepts and practices with these flashcards from Chapter 7. Learn how revenue, expenses, and net income tie into the income statement. This exercise is perfect for service businesses and accounting students alike.
