GAAP Income Statement Overview

Gross Profit

True (A)

False (B)

<p>To ensure that expenses are recorded in the same period as the revenue they generate. This principle aims to provide a clear picture of a business's profitability by linking costs to the revenues they directly contribute to.</p> Signup and view all the answers

<p>Accrual basis accounting dictates that revenue is recorded when it is earned, regardless of when payment is received. This may involve recognizing revenue even if an invoice hasn't been issued, as long as the earning process is complete.</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>The full disclosure principle requires companies to provide readers with all material information that could influence their understanding of the financial statements. This transparency helps readers make informed decisions based on a complete and clear picture of the company's financial health.</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Financial transactions should be recorded at their market values. (D)</p> Signup and view all the answers

<p>The 'time period assumption' is used to divide the continuous stream of business operations into specific, manageable timeframes for reporting purposes, such as months or years. This permits the assessment of performance within defined intervals, allowing for comparison and analysis.</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

The total amount of money a company earns from selling goods or services before any expenses are deducted.

The direct costs associated with producing the goods or services sold. This includes things like raw materials, labor, and manufacturing overhead.

The profit a company makes after subtracting COGS from revenue. This gives an idea of how efficiently a company produces its goods or services.

Expenses incurred in the day-to-day running of the business, not directly related to producing goods or services. Examples include rent, utilities, salaries, and marketing.

The profit a company makes from its core business operations after subtracting operating expenses from gross profit.

Income or expenses that are not directly related to the company's primary business activities. Examples include interest income, investment gains, and losses.

The final profit a company makes after all expenses, including taxes and interest, are subtracted from total revenue. It represents the company's overall profitability.

Specifies that revenue should be recorded when it is earned, not necessarily when cash is received. For example, if a company delivers goods to a customer, revenue is recognized even if the customer hasn't paid yet.

Matches expenses with the revenue they help generate in the same period. This ensures a true reflection of a company's profitability for a specific time period.

Requires companies to record revenue and expenses when they are earned or incurred, regardless of when cash is exchanged. Businesses recognize revenue when it is earned and expenses when they are used to generate that revenue.

This principle applies when determining the cost of goods sold and ensures that the cost of producing or acquiring goods is matched with the revenue generated from selling those goods. If the cost is not yet paid, it is still recorded as an expense.

Ensures that expenses related to payroll, such as salaries, vacation pay, and stock-based compensation, are recorded in the same period as the revenue they helped generate.

Ensures that unpaid costs relating to salaries, vacation pay, and stock-based compensation are recorded as expenses for the period they are earned, even if these costs will be paid in the future.

Under the revenue recognition principle, incremental costs, such as commissions based on successful deals, should be recognized over the customer's lifetime, ensuring revenue and expenses are fairly matched.

Ensures that commission expenses are recorded in the same period as the revenue they helped generate. If a salesperson earns a commission by selling goods, the commission expense is recognized in the same period as the revenue generated from the sale.

Requires that commission expenses be recorded when they are earned, even if payment is delayed. If a salesperson earns a commission in one period but will be paid in the next, the expense is accrued in the period earned.

Ensures that rent expenses are matched with the revenue they help generate. If a company rents a space to conduct business activities that generate revenue, the rent expense is recognized in the same period as the revenue generated from those activities.

Requires that any unpaid costs relating to rent, such as electricity or property taxes, are recorded as expenses in the period they are incurred, even if payment is delayed.

This principle applies to all expenses, including travel expenses, research and development costs, sales and marketing expenses, interest expense, depreciation, and taxes.

This principle requires companies to disclose any significant information that may affect a user's understanding of the financial statements. This disclosure usually takes the form of footnotes.

Requires that assets and liabilities be recorded at their original purchase price, or historical cost. This principle applies primarily to the balance sheet but also impacts the income statement.

This principle states that only items that can be measured in monetary terms should be recorded on financial statements. Intangible items, like employee skills or reputation, cannot be recorded because they lack a definitive monetary value.

This principle requires companies to keep separate financial records for each distinct business entity. This helps ensure that the financial performance of each entity is accurately reflected in its own financial statements.

This principle requires companies to report their financial performance for specific periods, such as a month, a quarter, or a year. This helps users compare financial performance over time.

This principle assumes that a company will continue to operate indefinitely, unless otherwise disclosed. This is important for financial reporting because it underpins the valuation of assets and liabilities.

This principle states that financial information should be relevant to users' needs. It should help them make informed decisions about the company's performance.

This principle requires that financial information be reliable, meaning it should be verifiable and objective. Verifiability means that the information can be confirmed by referring to its source. Objectivity means that the information is based on facts and evidence, not opinions or biases.

This principle requires companies to use the same accounting methods from period to period. This ensures that financial statements can be compared over time, making it easier to track the company's performance and progress.

This principle requires companies to use the least optimistic estimate when dealing with uncertainties. For example, if a company faces a legal claim, it should record the most conservative estimate of the potential loss.

This principle allows companies to ignore items that have an insignificant or immaterial effect on the financial statements. For example, the cost of paper clips would be considered immaterial in a large business.