WSP ACCOUNTING CRASH COURSE EXAM (THE
INCOME STATEMENT)
Income statement & why its important - Answers - financial report that depicts the
operating performance of a company over a specific period of time
Its important because it facilitates the analysis of a company's growth prospects, cost
structure and profitability
Analysts an use the IS to identify the components and sources (drivers) of net earnings
also referred to as consolidated statement of earnings, the profits and loss statement,
statement of revenues and expenses
Revenue (top line on IS) - Answers - Revenue represents proceeds from the sale of
goods and services produced or offered by a company; revenue is referred to company
top line.
A company can have other income not tied to core operations (income for legal
settlements, cash collected, etc)
Accrual basis is revenue must be recorded only when it is earned and measurable -
Answers - According to the revenue recognition principle, a company cannot record
revenue until it is earned -- that is, until that order is shipped to a customer and
collection from that customer, who used a CC, is reasonably assured
Revenue Recognition Method 1: Multiple deliverables - Answers - Fo sales of bundles
products, companies should assign individual values to each of the bundled
components → this is especially relevant in the software industry
ex: apple selling iphone that has price of hardware + software rights --> recognize
revenue of hardware immediately, but recognize software revenue evenly over several
yrs
Revenue Recognition Method 2: Long-term projects - Answers - Multiple methods:
1: percentage of completion method: revenues are recognized on the basis of the % of
total work completed during the accounting period (eg Boeing plan example)
2: completed contract method: rarely used in US, this method allows for revenue
recognition only once the entire project has been completed
Recall matching principle in relation to revenue and expense recognition - Answers -
States that expenses should be matched to revenues
, Revenues are recognized and recorded when an economic exchange occurs, while
expenses are recognized when the associated revenues are recognized, not
necessarily when cash is exchanged
Accrual vs cash accounting - Answers - Cash accounting objectively recognizes
revenues when cash is received and records costs when cash is paid out; accrual
accounting involves subjectivity in regards to the allocation of revenues and expenses
to different periods
Cash accounting is not allowed under GAAP, but for tax reporting certain businesses
are allowed to use cash basis
Non operating vs operating income and expenses on the IS - Answers - operating:
income and expenses generated and incurred from a company's core operations
nonoperating: income and expenses that are not tied to core operations of business
Everything below operating profit (income) is not directly related to operations of the
business; everything above is tied to core ops
Cost of Goods Sold (COGS)/Cost of Sales (line item on IS) - Answers - represents a
company's DIRECT cost of manufacture (for manufacturers) or procurement (for
merchandisers) of a good or service that the company sells to GENERATE REVENUE
COGS is a direct operating costs
Examples and nonexamples of COGS - Answers - Example of COGS: merchandise
inventory, raw material costs, direct labor costs, factory overhead), shipping and
delivery costs, any other costs directly associated with the generation of revenue,
depreciation of fixed assets
Costs such as corporate overhead, marketing and admin expenses, R&D, and salaries
of employees NOT directly associated with manufacture or procurement of a good or
service are not included in COGS
These costs are included under Selling, General & Administrative (SG&A) or other line
items
Gross Profit (line item on IS) - Answers - Net Revenues - COGS
Represents profit after only direct expenses (COGS) has been accounted for
SG&A (line item on IS) - Answers - SG&A represents the operating expenses not
directly associated with the production/manufacturing or procurement of the product or
service that the company sells to generate revenue
INCOME STATEMENT)
Income statement & why its important - Answers - financial report that depicts the
operating performance of a company over a specific period of time
Its important because it facilitates the analysis of a company's growth prospects, cost
structure and profitability
Analysts an use the IS to identify the components and sources (drivers) of net earnings
also referred to as consolidated statement of earnings, the profits and loss statement,
statement of revenues and expenses
Revenue (top line on IS) - Answers - Revenue represents proceeds from the sale of
goods and services produced or offered by a company; revenue is referred to company
top line.
A company can have other income not tied to core operations (income for legal
settlements, cash collected, etc)
Accrual basis is revenue must be recorded only when it is earned and measurable -
Answers - According to the revenue recognition principle, a company cannot record
revenue until it is earned -- that is, until that order is shipped to a customer and
collection from that customer, who used a CC, is reasonably assured
Revenue Recognition Method 1: Multiple deliverables - Answers - Fo sales of bundles
products, companies should assign individual values to each of the bundled
components → this is especially relevant in the software industry
ex: apple selling iphone that has price of hardware + software rights --> recognize
revenue of hardware immediately, but recognize software revenue evenly over several
yrs
Revenue Recognition Method 2: Long-term projects - Answers - Multiple methods:
1: percentage of completion method: revenues are recognized on the basis of the % of
total work completed during the accounting period (eg Boeing plan example)
2: completed contract method: rarely used in US, this method allows for revenue
recognition only once the entire project has been completed
Recall matching principle in relation to revenue and expense recognition - Answers -
States that expenses should be matched to revenues
, Revenues are recognized and recorded when an economic exchange occurs, while
expenses are recognized when the associated revenues are recognized, not
necessarily when cash is exchanged
Accrual vs cash accounting - Answers - Cash accounting objectively recognizes
revenues when cash is received and records costs when cash is paid out; accrual
accounting involves subjectivity in regards to the allocation of revenues and expenses
to different periods
Cash accounting is not allowed under GAAP, but for tax reporting certain businesses
are allowed to use cash basis
Non operating vs operating income and expenses on the IS - Answers - operating:
income and expenses generated and incurred from a company's core operations
nonoperating: income and expenses that are not tied to core operations of business
Everything below operating profit (income) is not directly related to operations of the
business; everything above is tied to core ops
Cost of Goods Sold (COGS)/Cost of Sales (line item on IS) - Answers - represents a
company's DIRECT cost of manufacture (for manufacturers) or procurement (for
merchandisers) of a good or service that the company sells to GENERATE REVENUE
COGS is a direct operating costs
Examples and nonexamples of COGS - Answers - Example of COGS: merchandise
inventory, raw material costs, direct labor costs, factory overhead), shipping and
delivery costs, any other costs directly associated with the generation of revenue,
depreciation of fixed assets
Costs such as corporate overhead, marketing and admin expenses, R&D, and salaries
of employees NOT directly associated with manufacture or procurement of a good or
service are not included in COGS
These costs are included under Selling, General & Administrative (SG&A) or other line
items
Gross Profit (line item on IS) - Answers - Net Revenues - COGS
Represents profit after only direct expenses (COGS) has been accounted for
SG&A (line item on IS) - Answers - SG&A represents the operating expenses not
directly associated with the production/manufacturing or procurement of the product or
service that the company sells to generate revenue
