15 Questions
Which one of the following statements is true about the fiscal year?
Each company has their own way to define the fiscal year.
What is the excess of revenues over expenses called?
Income
When does a company recognize revenue under the accrual basis?
When a company earns revenue
What is the decrease in net assets as a result of consuming or giving up resources called?
Expenses
What is the original acquisition cost of the inventory that a company sells to customers called?
Cost of goods sold
What is the total cumulative owners' equity generated by income called?
Retained earnings
What are financial statements prepared for?
The interim periods
Which of the following is a requirement for revenues to be recognized under accrual basis?
The customer has accepted the goods and services
When are revenues considered to be 'realized' under accrual basis?
When the company receives cash in exchange for goods and services
What is the purpose of the matching method in recognizing revenues?
To record expenses in the same time period as the revenues
What types of expenses are linked to revenues?
Product costs recorded during the sale
What types of expenses are not linked to revenues?
Period costs that support a company's operations
What is the purpose of the Income Statement?
To report all revenues and expenses pertaining to a specific time period
What is the net income on an income statement?
The remainder after deducting all expenses from revenues
What do we call it when expenses exceed revenues?
Net loss
Study Notes
Fiscal Year and Revenue Recognition
- A fiscal year is a period of time used for budgeting and financial reporting, but no specific information is provided about it.
Accounting Basics
- The excess of revenues over expenses is called net income or profit.
- Revenue is recognized under the accrual basis when it is earned, regardless of when cash is received.
Financial Statements and Expenses
- Financial statements are prepared to provide stakeholders with financial information about a company.
- A requirement for revenues to be recognized under accrual basis is that they are earned, regardless of when cash is received.
Revenue Realization and Matching
- Revenues are considered 'realized' under accrual basis when they are earned, regardless of when cash is received.
- The purpose of the matching method in recognizing revenues is to match costs with revenues in the same period.
Expense Classification
- Expenses linked to revenues are called matching costs, such as cost of goods sold.
- Expenses not linked to revenues are called period costs, such as salaries and rent.
Income Statement
- The purpose of the Income Statement is to report revenues and expenses over a particular period.
- Net income on an income statement represents the excess of revenues over expenses.
- When expenses exceed revenues, it is called a net loss.
Test your knowledge on revenues and expenses in the context of interim financial statements. Learn about how companies measure income, define the fiscal year, and prepare financial statements for interim periods.
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