Chapter 7 Test Cheat Sheet
Reporting Financial Information
 Information is need by managers and owners to make good decisions
o Summarized, organized and reported
 Adequate Disclosure
o Financial statements contain all info necessary to understand a business’s financial condition
 Accounting Period Cycle
o Preparing financial statements at the end of each fiscal period
 Single Lines show addition
 Double Lines show that the numbers balance
Income Statement Information on a Work Sheet
 Reports info over time showing the progress of the business in earning a net income or a net loss
 Matching Expenses with Revenue
o The revenue earned & expenses incurred to earn the revenue are reported in the same fiscal period
 Obtaining information
o Information to complete the sales portion of an income statement comes from the income statement
credit column
o Information to complete the expenses portion of an income statement comes from the income
statement debit column
 If the business has more than one source of revenue, only one income statement is prepared
Income Statement Numbers
 Net Income (Total revenue-Total Expenses )
o Must be the same as the net income on the worksheet
 Component percentage
o Percentage relationship between one financial statement item and the total that includes that item
 Total expenses component percentage (Total Expenses/Total Sales)
o Less than 55% is acceptable
 Net income/loss component percentage (Total Income or Loss/Total Sales)
o Not less than 45% is acceptable
 Negative numbers are shown in parentheses
Balance Sheet Information on a Work Sheet
 Balance sheet
o Shows the financial condition (strength) of a business on a specific date (not over time)
 Obtaining information
o Info to complete the assets portion of a balance sheet comes from the balance sheet debit column
o Info to complete the liabilities portion of a balance sheet comes from the balance sheet credit
column
 Three Headings
o Assets, Liabilities & Owner’s Equity
Calculating Owner’s Equity
 Capital on the worksheet shows the owner’s equity account at the beginning of the month
 The balance sheet shows the financial condition on a specific date
o Need to recalculate the current capital amount
 Assets=Liabilities+ Owner’s Equity (Assets-Liabilities=Owner’s Equity)
 Capital (Aug.1)+Net Income–Drawing = Owner’s Equity
 Capital (Aug.1)-Net Loss–Drawing = Owner’s Equity
 The owner’s equity section of a balance sheet may report different kinds of details about owner’s equity,
depending on the needs of the business