Questions and Answers
What is the accrual system?
Records revenues when they are earned and expenses when they are incurred, regardless of cash flow.
What is the cash system?
Records revenues when cash is received and expenses when cash is paid.
Which of the following is true regarding revenue recognition?
What does the matching principle relate to?
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What items are included in the statement of profit and loss for a merchandising organization?
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Which statement is true about sales returns and allowances?
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Define trade discounts.
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Gross Profit is calculated as cost of goods sold minus _____ .
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What is the Accrual System?
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What does the Cash System record?
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What principles govern income measurement?
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When should expenses be recognized according to the matching principle?
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Which of the following is a component of the statement of profit and loss for a merchandising organization?
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What are Sales Returns?
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Sales discounts are recorded on both the seller's and buyer's books.
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Gross profit is calculated as cost of goods sold - ______.
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What is the formula for Gross Profit Ratio?
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Study Notes
Income Measurement Basics
- Net profit/loss impacts equity; revenue and gains increase it, while expenses and losses decrease it.
Accrual System vs. Cash System
- Accrual System: Records revenues when earned and expenses when incurred, regardless of cash flow.
- Cash System: Records revenues when cash is received and expenses when cash is paid.
Income Measurement Principles
- Revenue Recognition Principle: Revenue is recorded when an asset increases or a liability decreases, not merely upon receipt of orders.
- Matching Principle: Expenses are recognized in the period revenue is earned, facilitating a comparison between effort and accomplishment.
Income Measurement Mechanics
- Involves adjusting entries like deferred revenue, accrued revenue, deferred expenses, and accrued expenses.
Financial Statements
- Service Organizations: Profit and loss statements can be presented in natural format (as per Schedule III of the Companies Act 2013) or functional format.
Merchandising Organizations
- Profit and loss statements comprise three main components: revenue from sales, cost of goods sold (COGS), and operating expenses.
Vijay Electronics Ltd Example
- Revenue from sales: 439120
- COGS: 298700
- Gross Profit: 140420
- Operating expenses: 76800, broken down into selling expenses (52300) and administrative expenses (24500).
- Profit before interest and tax: 63620
- Net profit after tax: 32920
Key Terms in Merchandising Income Measurement
- Revenue: Sales of goods, either cash or credit.
- Cost of Goods Sold (COGS): Total cost of merchandise sold during a period.
- Gross Profit: Calculated by subtracting COGS from sales.
- Gross Profit Ratio: Represented as a percentage of sales.
- Operating Expenses: Costs incurred to run the business, including selling and administrative expenses.
Sales Returns and Allowances
- Allows customers to return unsatisfactory goods; recorded as debits to cancel sales revenue.
- Sales Returns: Merchandise returned due to dissatisfaction; Sales Allowances: Deductions from the original invoice price when goods are kept but unsatisfactory.
Recording and Reporting Sales
- Net sales calculated as gross sales minus sales discounts, returns, and allowances.
Trade Discounts
- A percentage reduction from the list price granted to certain customers, facilitating varied pricing; not recorded in financial statements.
Income Measurement Basics
- Net profit/loss impacts equity; revenue and gains increase it, while expenses and losses decrease it.
Accrual System vs. Cash System
- Accrual System: Records revenues when earned and expenses when incurred, regardless of cash flow.
- Cash System: Records revenues when cash is received and expenses when cash is paid.
Income Measurement Principles
- Revenue Recognition Principle: Revenue is recorded when an asset increases or a liability decreases, not merely upon receipt of orders.
- Matching Principle: Expenses are recognized in the period revenue is earned, facilitating a comparison between effort and accomplishment.
Income Measurement Mechanics
- Involves adjusting entries like deferred revenue, accrued revenue, deferred expenses, and accrued expenses.
Financial Statements
- Service Organizations: Profit and loss statements can be presented in natural format (as per Schedule III of the Companies Act 2013) or functional format.
Merchandising Organizations
- Profit and loss statements comprise three main components: revenue from sales, cost of goods sold (COGS), and operating expenses.
Vijay Electronics Ltd Example
- Revenue from sales: 439120
- COGS: 298700
- Gross Profit: 140420
- Operating expenses: 76800, broken down into selling expenses (52300) and administrative expenses (24500).
- Profit before interest and tax: 63620
- Net profit after tax: 32920
Key Terms in Merchandising Income Measurement
- Revenue: Sales of goods, either cash or credit.
- Cost of Goods Sold (COGS): Total cost of merchandise sold during a period.
- Gross Profit: Calculated by subtracting COGS from sales.
- Gross Profit Ratio: Represented as a percentage of sales.
- Operating Expenses: Costs incurred to run the business, including selling and administrative expenses.
Sales Returns and Allowances
- Allows customers to return unsatisfactory goods; recorded as debits to cancel sales revenue.
- Sales Returns: Merchandise returned due to dissatisfaction; Sales Allowances: Deductions from the original invoice price when goods are kept but unsatisfactory.
Recording and Reporting Sales
- Net sales calculated as gross sales minus sales discounts, returns, and allowances.
Trade Discounts
- A percentage reduction from the list price granted to certain customers, facilitating varied pricing; not recorded in financial statements.
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Description
Test your understanding of income measurement fundamentals, including the accrual and cash accounting systems. Explore key principles like revenue recognition and the matching principle, as well as the impact of net profit on equity. This quiz will also touch on the preparation of financial statements for service organizations.
