Topic 4 - Income Statement

C213: Accounting for Decision Makers

Questions

1. What types of accounts are included on the income statement?

1. What is a single-step income statement?

1. What is a multiple-step income statement?

1. What are the five key measures of income on a multiple-step income statement?

1. When is revenue recognized in an accrual accounting system?

1. What are the three methods used to determine when to recognize an expense?

1. If sales in 2016 remain constant and cost of goods sold decreases, what happens to gross profit? Does it increase, decrease, or remain the same and by what percentage?

Example: 2016 2015

Sales $100,000 $100,000

Cost of goods sold (40,000) (60,000)

Gross profit $ 60,000 $ 40,000

1. For the following scenarios, indicate what year revenue would be recognized under accrual-basis accounting.
2. A theater company sells tickets for cash in 2019 for a performance that takes place in 2020.
3. In 2016, a manufacturing company collects cash from a customer for goods it sold and delivered to the customer in 2015.
4. In 2017, a consulting company enters into a contract with a customer and provides consulting services to the customer in 2018.
5. In 2018, a hospital collects cash from a customer for services they provided to the customer in 2017.
6. A department store sells (and delivers) merchandise on credit to a customer in November 2019. The customer pays for the merchandise in January 2020.
7. In late 2018, a toy company manufactures toys which it sells (and delivers) to its customer in 2019.

1. A department stores purchases inventory for $30,000 in 2019. They sell the inventory to their customers in 2020 for $55,000. The department store uses accrual-basis accounting. Based on the preceding information
2. What is the amount of the department store's cost of goods sold in 2019?
3. What is the amount of the department store's cost of goods sold in 2020?

1. A company president works the last week in December 2019, but her salary of $5,000 for that week is paid to her at the end of the first week in January 2020. The company uses accrual-basis accounting. Based on the preceding information
2. How much salary expense is incurred (recorded) by the company in 2019?
3. How much salary expense is incurred (recorded) by the company in 2020?

1. A manufacturing company rents warehouse space. The company pays their landlord $60,000 on November 1, 2019 to rent the warehouse space from November 1, 2019 through April 30, 2020. The manufacturing company uses accrual-basis accounting. Based on the preceding information
2. What is the amount of the manufacturing company's rent expense for 2019?
3. What is the amount of the manufacturing company's rent expense for 2020?

1. Transaction Analysis - Based on the accounting equation, for each transaction below indicate (i) which balance sheet accounts of the company are adjusted and

(ii) whether each account involved increases or decreases as a result of the transaction.

1. A company sells (and delivers) goods to a customer for cash (ignore the effect on cost of goods sold).
2. A company records cost of goods sold.
3. A company pays employee wages in cash for work the employees have just completed.
4. A company sells (and delivers) goods to a customer on account (i.e., a credit sale) (ignore the effect on cost of goods sold).
5. A company receives cash from their customers for sales the company previously made to the customers on account.
6. A company pays the bank cash for interest on the company's loan from the bank (assume the interest was not previously accrued/recorded).

By the end of the year, some of the company's prepaid insurance has expired.