FINANCE: Accounting / The Income Statement
DIRECTIONS: Use the notes you took in class to complete the following questions. T/F, MC, and Fill-in-the-blank questions count 2 points; points for essay questions vary (see points in parentheses).
1. Which of the following is not one of the roles/responsibilities of a financial manager?
- recording cash inflows and outflows
- recording transactions of the company
- issuing stock or borrowing money to raise money (capital) for the company
- allocating (distributing) capital
- putting together financial reports for stockholders, the IRS (= Internal Revenue Service), lenders (e.g. banks), and company management
- forecasting the performance of the company in the future
- All of the above are roles/responsibilities of the financial manager.
- a, b, c
- d, e, f
2. LIST at least four (4) parties interested in the financial results calculated/reported by the financial manager and STATE THE REASON for their interest. (4 pts)
3. T / F The users of financial reports include external and internal users.
3. GAAP stands for _____________ ________________ _________________ _________________.
4. T / F GAAP are the same in all countries.
5. State the reason that all U.S. firms report their financial information in the same way.
6. A financial manager who keeps track of and records the company's sales, expenses, and profits is probably preparing an _____________________________.
7. Write the general equation for the income statement. (2 pts)
8. Earnings are the same as _____________ or ________________.
9. T / F Profit is the difference between the dollar volume of products sold and what it cost the firm to make them, i.e. what is left over for the company to use.
10. The dollar value of what the customer bought from the company is called ______________.
11. Sales is calculated by multiplying _____________________ by _________________.
12. In the service industry, the term sales is not used on the Income Statement. Instead, this item is called ___________________.
13. T/F When companies report monthly expenses on the income statement, they must include all money that has been paid out during that month.
14. T/F The matching principle states that expenses of only those items that were used up and generated a sale must be recorded during the period covered by the income statement.
15. Expenses are ____________ in generating _______________. (2 pts)
16. Give an example of an expense that a company incurs. (2 pts)
17. A company receives its electric bill in September and has until October to pay it. On which income statement Should this expense be included? State why.
September Reason: _________________________________________________
October Reason: _________________________________________________
18. The _____________ ________________ in accounting states that costs used up to generate (make) sales in one period must be recorded in that period.
19. The two kinds of expenses are _____________ and _______________.
20. Expenses that do not fluctuate (change) when sales change are called ________________.
21. Salaries are an example of
- the matching principle
- a variable expense
- a fixed expense
22. What kind of expense are the following:
rent (fixed / variable)
utilities (fixed / variable)
wages (fixed / variable)
23. The Income Statement covers
- a period of time
- a point in time
24. The term sales in the ice cream business includes all except
- ice cream cones
25. The term cost of goods sold in the ice cream business includes all except
- The cost of the ice cream left in the freezer
- The cost of the cones
- The cost of the ice cream scoops sold to customers
- The cost of the person selling ice cream (labor)
26. T / F The cost of goods sold changes with our sales and is therefore variable.
27. The difference between what customers bought and what it cost the business to produce the goods is called
- operating profit
- profit margin
- net income
28. STATE the basic formula for calculating gross profit.
29. What kind of an expense is spoilage?
30. What kind of an expense is wages?
31. Define wages.
32. T / F Payroll remittances include salaries and wages.
33. In order to operate legally, a company must obtain a _____________ from the city or state.
34. T / F Advertising is a variable expense because is changes with the number of sales.
35. EBIT stands for _______________ ______________ ___________ ______ ___________.
36. A synonym for EBIT is ________________ _________________.
37. T / F The government (IRS) uses the operating profit figure on the income statement to calculate a firm’s taxes.
38. T / F The operating profit figure tells us how much it cost the company to run the business.
39. The standard corporate tax rate is ________%.
40. What can a business do with its profit?
- pay it out as dividends to stockholders
- reinvest it by building another ice cream stand, for example
- growing the company
- a combination of a, b, c
- all of the above
- none of the above
41. The Report of independent auditors is important to
- The Board of Directors
- All of the above
42. T / F The auditors who compose the Report are managers within the company.
43. If a Report states that the financial statements present “fairly, in all material respects, except for …”, this is a
- clean, unqualified opinion
- qualified opinion
44. The term “fairly, in all material respects” in the Report of independent auditors indicates that
- there are too many materials in the report
- there are serious errors in the report
- there are no errors whatsoever in the report
- there is nothing significantly wrong in the report.