Question

1. How does Peter Drucker define profit?

2. Define the term “cash basis accounting”.

3. Define the “matching principle”

4. Describe the delivery company that purchased a truck in January and how it applies to the matching principle.

5. Explain why the Income Statement does not account for the inflows and outflows of cash.

6. Define the purpose of the Income Statement.

7. List three alternative names for the Income Statement

8. What time periods can the Income Statement cover?

9. Public companies must follow GAAP in compiling financial statements TRUE/FALSE

10. What is a Pro-forma Income Statement?

11. Sales and Revenue on the Income Statement mean the same thing TRUE/FALSE

12. Define the term “Cost of Sales”.

13. Why are footnotes considered to be an important part of the financial statements?

14. What is the “One Big Rule” when reading financial statements?

15. In its simplest form, when can a company recognize a sale?

16. In the example in the book, how did the software company manipulate revenue recognition?

17. What is “channel stuffing”?

18. “The most common source of accounting fraud has been and probably always will be _____________

19. Define “deferred revenue”.

20. “Above the line” on the Income Statement refers to what?

21. “Below the line on the Income Statement refers to what?

22. Define “Operating Expenses”

23. Operating expenses are often thought of and referred to as ________________

24. How did Waste Management Inc. use depreciation to manipulate earnings?

25. Why is depreciation and amortization considered a “non-cash expense”?

26. Give an example of a “one time charge”.

27. Expenses should be listed on the Income Statement to assist management in analyzing the business. TRUE/FALSE

28. Gross Profit varies by industry. TRUE/FALSE

29. Compare the gross profit of a grocery business to a jewelry store.

30. Define Operating Profit or EBIT

31. List three ways Operating Profit can measure how well or poorly a company is being managed

32. Define EBITDA

33. Why is EBITDA favored over EBIT by financial analysts?

34. Define “Net Profit”

35. List the three legitimate fixes to a low net Profit

36. What are the negative consequences of reducing Operating Expenses as a strategy to increase Net Profit?

37. How can “exchange rates” adversely affect Net Profit?
38. Can you answer all of the questions.

Answer 1

1. How does Peter Drucker define profit?

Peter Drucker has defined the term “profit Centre” which states that it is a branch or division of the organisation that directly adds or is expected to add to the bottom line. It is treated as separate, Standalone Business, responsible for generating its revenue

2. Define the term “cash basis accounting”.

It is the type of accounting method which recognises revenue and expenses at the time cash is paid

Second time is accrual method of accounting

3. Define the “matching principle”

It states that the company should report an expense in its income statement in the period in which related revenues are earned.

4. Describe the delivery company that purchased a truck in January and how it applies to the matching principle.

5. Explain why the Income Statement does not account for the inflows and outflows of cash.

Because Income Statement includes non-cash expenses such as depreciation which Is not actual outflow of the company

Income Statements measures a company’s performance which includes revenue and expenses and Cash flow should exact cash situation of the company which included inflow and outflow

6. Define the purpose of the Income Statement.

Income Statements measures a company’s performance which includes revenue and expenses also includes non-cash expenses like depreciation.

7. List three alternative names for the Income Statement

P&L statement, Statement of Earning, Statement of Operations

8. What time periods can the Income Statement cover?

Income Statement cover one financial year time period

9. Public companies must follow GAAP in compiling financial statements TRUE/FALSE

True US companies are required to follow GAAP,Countries outside can follow IFRS.

10. What is a Pro-forma Income Statement?

Pro-Forma refers to forecasted Statement

11. Sales and Revenue on the Income Statement mean the same thing TRUE/FALSE

True Sales is also called as Revenue or Turnover.

12. Define the term “Cost of Sales”.

Cost of Sales refers to direct cost incurred in production of goods,

Cost of sales measures the cost of goods produced or services provided in a period by an entity

13. Why are footnotes considered to be an important part of the financial statements?

Footnotes considered to be an important part of the financial statements because they give additional information on how they are arrived at the numbers mentioned in Financial Statements.

14. What is the “One Big Rule” when reading financial statements?

Many numbers on the statement reflect estimates and assumptions.

Profit is not equal to cash

15. In its simplest form, when can a company recognize a sale?

Revenues are recognized when they are realized or realizable, and are earned

Usually when goods are transferred or services are provided no matter when cash is received

16. In the example in the book, how did the software company manipulate revenue recognition?

Software maker sold five-year license agreements for its software. In accordance with conservative revenue recognition rules, TSAI only recorded revenues from these agreements when the customers were billed through the course of the five-year agreement, that is, as these revenues were being earned by the company.

17. What is “channel stuffing”?

It is the practice in which companies or the sales force within a company, Fakes its sales figure by forcing more products through its distribution channel than its capability

18. “The most common source of accounting fraud has been and probably always will be in its top line (Sales)

19. Define “deferred revenue”.- Refers to payments received in advance for which services are not been rendered or goods have not been delivered.

20. “Above the line” on the Income Statement refers to what?

Income and Expenses that relates to normal operations of the company

21. “Below the line on the Income Statement refers to what?

It refers to items in the income statement which actually does not affects the company’s revenue of the same year

22. Define “Operating Expenses”

They are the expenses which are generated due to regular course of business

23. Operating expenses are often thought of and referred to as _ specific costs after gross revenue _______________

24. How did Waste Management Inc. use depreciation to manipulate earnings?

They avoided depreciation expenses by extending the estimated useful lives of the Company's garbage trucks while, at the same time, making unsupported increases to the trucks' salvages values

25. Why is depreciation and amortization considered a “non-cash expense”?

It is considered as non cash expense because even though asset value is decreasing there is actually no cash outflow.

26. Give an example of a “one time charge”.

It can include purchase of Supplied Hardware, Software, installation and networking of equipment

27. Expenses should be listed on the Income Statement to assist management in analyzing the business. TRUE

28. Gross Profit varies by industry. TRUE

29. Compare the gross profit of a grocery business to a jewellery store.

Gross Profit of grocery store is less as compared to that of jewellery due to less margin in the product sell.

30. Define Operating Profit or EBIT

Earnings before interest and taxes (EBIT) indicates company's profitability.

EBIT =revenue-expenses excluding tax and interest.

EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes

31. List three ways Operating Profit can measure how well or poorly a company is being managed

Comparing EBIT with sales EBIT with Total Assets and EBIT with Capital Employed in the business

32. Define EBITDA

Net Income with interest, taxes, depreciation, and amortization added back

33. Why is EBITDA favored over EBIT by financial analysts?

EBIT reveals the accrual basis results of operations, while EBITDA gives a rough approximation of the cash flows generated by operations.

34. Define “Net Profit”

Net Profit is bottom line of the business which is calculated after subtracting all the cash and noncash expenses.

35. List the three legitimate fixes to a low net Profit

Reducing Expenses, Selling more good or increasing the price of the product.

36. What are the negative consequences of reducing Operating Expenses as a strategy to increase Net Profit?

Cheaper source of raw material will affect quality of goods, reducing other operating expenses may hamper quality of the service and goods

37. How can “exchange rates” adversely affect Net Profit?

It is caused by the effect of unexpected currency fluctuations on a company's future cash flows and market value and is long-term in nature. The impact can be substantial, as unanticipated exchange rate changes can greatly affect a company's competitive position, even if it does not operate or sell overseas