Accrual Basis Income Statement
Practice as You Learn
Introduction to Accounting
Accrual Basis Income Statement
Practice as You Learn
When cash is paid or received DOES NOT MATTER to the income statement!
Report revenue when:
1) The goods or services are provided and the performance obligation is met, and
2) Receipt of cash the company is entitled to is expected
Report expenses when:
1) The service is provided to the company, or
2) An asset is used (up) to provide goods or services
Practice as You Learn Problem 1
Indicate which section of the classified income statement the item will be reported under:
S Sales
CGS Cost of Goods Sold
OE Operating Expense
ORE Other Revenue and Expense
N Not reported on the income statement
_____a. rent expense
_____b. depreciation expense on administrative furniture
_____c. insurance expense
_____d. selling investments at a loss
_____e. collections from customers; goods were provided last period
_____f. restructuring expense
_____g. loss from a fire
_____h. the cost of inventory provided to customers; current period
_____i. executive salaries
_____j. advertising expense
_____k. the value of goods provided to customers; current period
_____l. supplies on hand
Answer
OE a. rent expense
OE b. depreciation expense on administrative furniture
OE c. insurance expense
ORE d. selling investments at a loss
N e. collections from customers; goods provided last period (cash and A/R)
OE f. restructuring expense
ORE g. loss from a fire
CGS h. the cost of inventory provided to customers; current period
OE i. executive salaries
OE j. advertising expense
S k. the value of goods provided to customers; current period
N l. supplies on hand – this is an asset
Practice as You Learn Problem 2
A company has the following accounts at the end of the year. Prepare a multi-step income statement for the period ended December 31st.
Insurance expense
Loss from a flood
Salesman salary expense
Rent income
Income tax expense
Sales revenue
Inventory
Accumulated depreciation
Loss from selling major part of the business
Interest expense
Cost of goods sold
Depreciation expense
Dividends declared and paid
Rent expense
Answer
Sales revenue
– Cost of goods sold
= Gross profit
– Operating expenses:
Insurance expense
Depreciation expense
Salesman salary expense
Rent expense
= Income from operations
– + Other revenues and expenses
Loss from a flood
Rent income
Interest expense
=Income before tax
– income tax expense
= income from continuing operations
– Discontinued operation (loss from selling part of the business)
= Net income
Note:
Subtotal lines and amounts are very important.
Dividends are not an expense and are not reported on the income statement.
Accumulated depreciation is the cumulative amount and is on the balance sheet
Practice as You Learn Problem 3
A company had the following transactions during the first month of the year. Prepare a multi-step income statement for the month ended January 31st.
a. paid $16,000 in salaries and wages incurred during January
b. sold $100,000 of goods that cost $48,000
c. collected $69,000 from customers for sales in December
d. paid $900 for rent for January and the next two months
e. received $100 for interest earned in December
f. the cost of using equipment was $500 for January
g. received a bill for utilities for January for $1,100; paid in February
h. paid the utility bill for December; $950.
i. the company’s tax rate is estimated to be 30%
Answer
| Sales | 100,000 |
| – Cost of goods sold | (48,000) |
| = Gross profit | 52,000 |
| – Operating expenses | |
| Salary and wage expense | ( 16,000) |
| Rent expense | ( 300) |
| Depreciation expense | ( 500) |
| Utilities expense |
( 1,100) |
| Income from operations before tax | 34,100 |
| Tax expense |
( 10,230) |
| Net Income | 23,870 |
c. Collecting cash from customers is not revenue. Providing the goods in December is December revenue.
d. The amount paid for the next two months rent is recorded on the balance sheet as $600 prepaid rent
e. Interest earned in December is a December revenue. When the cash is collected does not matter to the income statement.
h. Utilities provided in December is a December expense. An expense is not recorded when cash is paid, it is reported when the service is provided to the company.