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Questions and Answers
What is the operating cycle/cash-to-cash cycle?
The time it takes for a company to pay cash to suppliers, sell those goods and services to customers, and collect cash from customers.
What assumption relates to reporting financial information for relatively short time periods?
The formula for calculating gross profit is sales minus _________.
cost of sales
What are operating revenues?
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What are primary operating expenses?
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Earnings before income taxes is calculated after deducting income tax expense.
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Study Notes
Operating Cycle / Cash-to-Cash Cycle
- The operating cycle measures the duration from cash payments to suppliers to cash collection from customers.
- Understanding this cycle helps businesses manage their cash flow efficiently.
Periodicity Assumption
- Financial information is reported over short time periods (monthly, quarterly, annually) to aid decision making.
- The frequency of reporting is influenced by the size of the business.
- Two critical issues in periodic reporting:
- Recognition issues: Timing of recording transactions and their impacts.
- Measurement issues: Determining the correct amounts to be recorded for transactions.
Income Statement / Statement of Earnings
- Structure of the income statement:
- Sales minus Cost of sales yields Gross profit.
- Gross profit minus Operating expenses equals Earnings from operations.
- Adjusting for Non-operating revenues/expenses and gains/losses leads to Earnings before income taxes.
- Subtracting Income tax expense results in Net earnings.
Revenues and Expenses
- Revenues are increases in assets or reductions in liabilities from the company’s ongoing operations.
- Operating revenues stem from the sale of goods and services.
- Expenses are decreases in assets or increases in liabilities that occur to generate revenues.
- Expenses are vital for understanding the overall profitability of the business.
Primary Operating Expenses
- Cost of sales (or Cost of goods sold) represents the cost of products sold to customers; typically the largest expense for manufacturing or merchandising companies.
- Gross profit (or gross margin) is calculated as Sales (after discounts, returns, allowances) minus Cost of sales.
- Operating expenses encompass all other usual expenses beyond the cost of sales, necessary for daily operations.
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Description
This quiz explores fundamental finance concepts, including the operating cycle and its impact on cash flow management. Further, it examines the periodicity assumption in financial reporting and the structure of the income statement. Test your knowledge on these essential topics!
