Question

The major components of the income statement are as follows:

1- Revenues, 2- Income from continuing operations, 3- Earnings per share, 4- Results from discontinued operations, ​5- operating income, 6- Income tax, 7- COGS.

In what sequence (order) do they normally appear on the income statement?

Select one: a. 1-7-5-6-2-4-3 b. 1-5-7-2-6-4-3 c. 1-7- 2-5-6-4-3 d. 2-7-1-3-4-5-6

لقد قمت بالرد على Mohammad Hani Muhanna

The major components of the income statement are as follows: ...

On June 30, a company paid $3,600 for insurance premiums for the current year and debited the amount to Prepaid Insurance. At December 31, the bookkeeper forgot to record the amount expired (forget to do the adjusting entry). The omission has the following effect on the financial statements prepared December 31: Select one: a. overstates both owners’ equity and assets. b. understates net income. c. overstates owners' equity. d. overstates assets.

Answer 1

1)1-7-5-6-2-4-3

This is the correct normal  sequence of components of Income statement .

The sequence is explained below

1)revenues are recorded first

7)Cost of Goods Sold(COGS) is subracted from revenues to get Gross profit

5)After Deducting operating expenses, operating income is computed

6)Income tax is deducted from operating income

2) After Deducting Income tax we get ,income from Continuing operation

4)Results From Discontinued Operation should be shown as a separate line item after computing income from continuing Operation

3)Earnings Per share is calculated as the last item in the income statement to show earnings earned by shareholders per share

The rest of the sequence are wrong.

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Option a) Overstates both owners quity and Assets is the correct answer

The jouranl entry made when prepaid insurance was made is

Adjousting Journal Entry That should have been made when it expires was

Since adjusting entry was ommited , the net income was overstated as the insurance expense is not expensed. Since net income is overstated , retained earnings was also overstated ,thereby overstating   overall owners equity.

The prepaid insurance needs to be canceled(credited) out after expiry. However due to no recording of adjusting entry , the prepaid insurance is still in the year end Balance sheet ,thereby overstating the assets.

Thus option A overstates both owners equity and assets is the correct answer

• Understates net income - net income is not understated but rather overstated
• Overstates Owners euity - This answer is partially correct but a better option is option A
• Overstates Assets - This answer is also correct but the best answer is option A

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