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Questions and Answers
What is included in an Income Statement?
What is included in an Income Statement?
Sales or Service Revenue minus Expenses such as advertising expense, fuel expense, rent expense, utility expense, salaries and wages expense.
What is the first step in preparing a Statement of Retained Earnings?
What is the first step in preparing a Statement of Retained Earnings?
Start with a 1/1 balance if you have one or leave it blank if the company just started.
What does the accounting equation state?
What does the accounting equation state?
Assets = Liabilities + Stockholders' Equity
What is net income calculated from?
What is net income calculated from?
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Revenues and expenses are reported on the balance sheet.
Revenues and expenses are reported on the balance sheet.
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What is the effect of an increase in assets of $20,000 and an increase in liabilities of $10,000?
What is the effect of an increase in assets of $20,000 and an increase in liabilities of $10,000?
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What should be included in a Balance Sheet?
What should be included in a Balance Sheet?
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The body of an income statement has three major captions: revenues, expenses, and _____?
The body of an income statement has three major captions: revenues, expenses, and _____?
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What is reported on both the income statement and the statement of retained earnings?
What is reported on both the income statement and the statement of retained earnings?
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Which of the following represents how liabilities are defined?
Which of the following represents how liabilities are defined?
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When are expenses reported on the income statement?
When are expenses reported on the income statement?
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Study Notes
Income Statement
- Contains Sales or Service Revenue minus total Expenses.
- Key Expenses include advertising, fuel, rent, utilities, salaries, and wages.
- Net Income is calculated as Revenues minus Expenses.
Statement of Retained Earnings
- Starts with a balance from January 1, or can be left blank for new companies.
- Net Income from the Income Statement is added to the starting balance.
- Dividends are subtracted to arrive at Retained Earnings as of December 31.
Balance Sheet
- Follows the equation: Assets = Liabilities + Stockholders' Equity.
- Lists total Assets, Liabilities, and Stockholders' Equity with detailed categories.
- Assets include Cash, Accounts Receivable, Equipment, and Land.
- Liabilities contain Accounts Payable and Notes Payable.
- Stockholders' Equity includes Common Stock and Retained Earnings.
Importance of the Balance Sheet
- Creditors assess the company's ability to generate cash for loan payments.
- Evaluates sufficiency of company resources to cover liabilities.
Income Statement Structure
- Comprises three main sections: Revenues, Expenses, and Net Income.
- Individual revenues and expenses are categorized under their respective headings.
- Net income appears on both the Income Statement and the Statement of Retained Earnings.
Reporting Timing
- Expenses are recognized when incurred, independent of cash payment timing.
- Net income is a preferred term in accounting versus casual discussions of "profit."
Accounting Equation Dynamics
- Changes in one side of the accounting equation affect the other.
- Example: An increase in Assets of 20,000 with Liabilities increase of 10,000 results in a 10,000 increase in Stockholders' Equity.
Retained Earnings
- Reflects the changes in net income and dividends distributed during the period.
- Not a reflection of asset value but a measure of the company's financial position.
Statement of Cash Flows
- Reports cash inflows and outflows but does not include revenues and expenses.
Liabilities Overview
- Defined as probable debts resulting from past transactions, fulfilled by assets or other obligations.
- Not all liabilities contain "payable" in their names.
Journal Entries for Transactions
- Equipment purchase example:
- Debit Equipment 100,000
- Credit Cash or Notes Payable 100,000
- Paying an expense example:
- Debit Expense 100,000
- Credit Cash or Accounts Payable 100,000
- Inflows of cash example for new investments:
- Debit Cash 100,000
- Credit Common Stock 100,000
Revenue Recognition
- Revenue is recorded when earned, regardless of cash receipt timing.
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Description
This quiz covers the key components of financial statements, including the Income Statement, Statement of Retained Earnings, and Balance Sheet. Learn about revenues, expenses, and how different financial elements interact. Test your understanding of how these statements serve businesses in assessing financial health.
