ACCOUNTING CH1 NOTES pt2
INCOME STATEMENT- reports revenues and expenses to illustrate the profitability of the
company over a period of time (generally one year)
● Revenue-expenses=net income
○ Revenue: it concerns a concept of how much goods we have provided, in other
words, amount expected to be received from a customer for goods or services. It
is distinct from cash. U cannot record revenue until u provide the service or good
to customer to encourage the company to actual provide the good
○ So that revenues and expenses coincide with one another, Revenue and
expenses are matched
○ Expenses:
NET SALES: revenue
COST OF SALES: cost of goods sold
GROSS MARGIN: revenue-cost of goods sold
EXPENSES: other operating expenses/ Selling, general and administrative (e.g. wages,
machinery, electricity)
DEPRECIATION & AMORTIZATION: Depreciation is taking the cost or worth of an
asset and spreading it across its years (e.g. a machine originally worth $1,000 and each
year is worth $250, so after one year, its worth $750, so we record depreciation:$250)
OPERATING INCOME: $ u get from ur services after all expenses are subtracted
GAINS AND LOSSES (non-operating)
INTEREST- NET: money owed because of interest on debt
LOSS OF EXTINGUISHMENT OF DEBT: choosing to pay off some debt early. It’s the
extra money i payed to get rid of some extra debt
PRE-TAX EARNINGS: before tax
NET EARNINGS: after tax
WHY CONSIDER PRIOR PERIODS? Showing previous performance records, we can see any
trends, if events are a one-time thing or persistent
STATEMENT OF STOCKHOLDER’S EQUITY- reports inflow of resources from investors to the
business and outflows from the business to investors over a period of time. Provides extra
details on Stockholders’ Equite section of the balance sheet
● Beginning balance
+/- contributed capital changes
+/-Retained earning changes
= Ending balance
● Retained Earnings (RE): accumulated net income not distribute to shareholders thru
dividends but reinvested in the company, part of SE and appears on balance sheet
(Beginning retained earnings+net income- dividends= ending retained earnings)
STATEMENT OF CASH FLOWS- reports sources of cash inflows and outflows over a period of
time
● Change in cash flow from operating activities (day to day operations)
● From investing activities (purchasing and selling long-lived assets)
● From financing activities (capital providers)
● All 3 added together gives total change in cash
ACCOUNTING RULES
● US: Financial accounting standard known as “Generally Accepting Accounting
Principles” (GAAP)
● In the US, the FASB writes the accounting rules
● Many other countries use IFRS