Revenue Recognition & Accrual Accounting Principles
According to the revenue recognition principle, when should revenue be recognized?
Revenue should be recognized when it is earned, which means when the goods or services have been provided, regardless of when the payment is received.
What basic financial statements can be found in a corporate annual report?
Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.
What category would the following expense be? Advertising expense
Operating Expense
How is the cost of goods sold calculated?
COGS = Beginning Inventory + Purchases - Ending Inventory.
What does the income statement measure for a firm?
The results of operations for a period.
Mike's Auto Shop starts work on March 20, finishes on March 22, invoices on April 12, and receives payment on April 20. When should revenue be recognized?
March 22, when the service was completed and delivered.
What is the accrual basis of accounting?
Recognition of revenue in the accounting period when the sale is made rather than when cash is received, and matching expenses with revenue in the appropriate accounting period.
When should expenses be recognized under the accrual basis of accounting?
When they are incurred, regardless of when payment is made.
The difference between revenue and cost of goods sold is known as what?
Gross profit.
What is a common-size income statement?
A statement that expresses each item on the income statement as a percentage of net sales.
How are revenues and expenses recognized under the accrual basis of accounting?
Revenues are recognized in the accounting period when the sale is made, and expenses are recognized in the period in which they relate to the sale of the product.
How is the earnings per common share calculated?
Net profit divided by the average number of common stock shares outstanding.
Which employee salaries are excluded from the Cost of Goods Sold line item in an income statement?
Back office staff salaries, as they are administrative and not directly related to production.
What does the gross profit margin represent, and why is it important?
It represents the percentage of revenue that exceeds the cost of goods sold; it's important for assessing the efficiency of a company's production process.
How are operating profit and net profit margins calculated
Operating profit margin = (Operating Profit / Sales) × 100; Net profit margin = (Net Profit / Sales) × 100.
What conditions must be met for revenue to be recorded according to the accrual basis of accounting?
Revenue must be earned, the amount must be measurable, and it must be realized or realizable.
How are selling and administrative expenses classified on the multiple-step income statement?
After gross profit.
Which of the following is most descriptive of the “matching principle,” as this term is used by
accountants? For a given period of time, a company’s expenses should be matched with the
company’s
Revenues
Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating
expenses. Cost of goods sold equals:
$450,000
How are revenues and expenses expressed in a common-size income statement?
As percentages of net sales.
Which principles form the basis for the accrual basis of accounting?
The Revenue Recognition Principle and the Matching Principle.
A company reports the following information: Net Sales of $1,200,000, Cost of Goods Sold (COGS) of $700,000, Operating Expenses of $250,000, Interest Expense of $30,000, and Income Tax Expense of $50,000. What is the company's net income?
$170,000
Why is the figure for operating profit important?
The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status.
What are the three profit measures calculated from the income statement?
Gross profit margin, operating profit margin, and net profit margin.
What equation represents an income statement?
Revenues + Gains - Expenses – Losses = Net Income.