Week 3 income stmt, margins, markup.

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Questions and Answers

What is the primary use of financial accounting?

For internal decision-making purposes

To manage the company's assets

To reduce tax liabilities

To provide information to external parties (correct)

What does GAAP stand for?

General Aggressive Accounting Policies

Generally Accepted Accounting Principles (correct)

Gains Accumulated and Accounting Principles

Government Approved Accounting Procedures

What does the matching principle in accounting state?

Expenses must be matched with the revenue they generate (correct)

Expenses should be recorded when they are paid

Revenue should be recognized at year-end only

Expenses should be accounted for only during cash transactions

Why is understanding margins important in business decisions?

It influences pricing, promotions, and product distribution Signup and view all the answers

What is the formula for calculating unit margin in dollars?

Selling Price per Unit - Cost per Unit Signup and view all the answers

Which option correctly defines gross profit?

Sales revenue minus cost of goods sold Signup and view all the answers

What is the correct way to calculate selling price using markup?

Selling Price = Product Cost + (Product Cost X Markup %) Signup and view all the answers

Which of the following statements about unit margins is true?

Unit margin percentages can provide insights into profitability Signup and view all the answers

What is the primary purpose of the income statement?

To summarize revenues and expenses over a specified time period Signup and view all the answers

Which of the following is not a major section of the income statement?

Cash Flows Signup and view all the answers

What type of accounting reports are primarily used by internal stakeholders?

Managerial accounting reports Signup and view all the answers

In the income statement, what does net income represent?

Revenue minus expenses Signup and view all the answers

Which of the following correctly describes the matching principle in accounting?

Expenses should be matched with the revenues they helped to generate Signup and view all the answers

What does GAAP stand for?

Generally Accepted Accounting Principles Signup and view all the answers

Which expense is NOT listed in the South Shore T-Shirt Shop's income statement?

Sales Returns Expense Signup and view all the answers

Which financial statement reports the company’s revenues and expenses?

Income Statement Signup and view all the answers

Study Notes

Income Statement

One of four financial statements: income statement, statement of retained earnings, balance sheet, and statement of cash flows
Reports revenues less expenses for a certain period
Financial accounting reports are used by people outside the company such as creditors, investors, directors, and government
Managerial accounting reports are used within the company for internal financial plans and operating performance reports
Revenue is the amount earned from selling goods or services
Expenses are the costs incurred to generate revenue
Net Income is the difference between revenue and expenses, which increases shareholders' equity

Income Statement - Major Sections

Revenue
- Sales Revenues
- Sales Returns
- Net Sales
Cost of Goods Sold (COGS)
Gross Profit (or Gross Margin)
Selling & Admin Expenses
- Office Supplies Expense
- Wages & Benefits Expense
- Rent Expense
- Utilities Expense
- Insurance Expense
- Advertising Expense
Total Expenses
Operating Profit
Income Tax Provision
Net Income

Income Statement - Accounting Methods

Cash accounting method: recognizes revenue and expenses when cash is received or paid
Accrual accounting method: recognizes revenue when earned and expenses when incurred
GAAP (Generally Accepted Accounting Principles) is a set of standards for financial accounting and reporting in Canada, established by CPA Canada and AcSB

Margins

The difference between a product's selling price and its cost.
Understanding margins helps make better decisions on pricing, promotions, distribution, and product strategy

Unit Margin

Unit Margin ()=SellingPriceperUnit() = Selling Price per Unit ()=SellingPriceperUnit() – Cost per Unit ($)
Unit Margin (%) = Unit Margin ()/SellingPriceperUnit() / Selling Price per Unit ()/SellingPriceperUnit() X 100
Each business defines a "unit" based on their industry and the decision being made

Margins When Selling Multiple Products

Calculate the overall margin in dollars: (# Units Prod A X Unit margin Prod A in ) + (# Units Prod B X Unit margin Prod B in ) +...for all product types
Calculate the overall margin as a percentage: Overall (Total) Gross Margin in /Overall(Total)Revenuein / Overall (Total) Revenue in /Overall(Total)Revenuein X 100

Margin vs Markup

Margin: The difference between selling price and cost, expressed as a percentage of the selling price.
Markup: A percentage added to the product cost to determine the selling price.

Markup Calculation

Selling Price = Product Cost + (Product Cost X Markup %)

Channel Margins

"Chaining" in a distribution channel refers to the same dollar amount being the selling price for one company and the cost for another company in the same distribution channel.

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Description

This quiz covers the key concepts of the income statement, one of the essential financial statements used by companies. It explores various sections such as revenue, cost of goods sold, and net income, highlighting their relevance for both internal and external stakeholders. Understand how these elements reflect a company's financial performance over a specific period.