BE 601

Class 2 – Income Statement

Presented by: Michelle Lennox

Conrad School of Entrepreneurship and Business

Recap
 What is the accounting equation?

 What are four basic financial statements?

 What is the balance sheet?

Class 2 – Income Statement 2

Recap

Class 2 – Income Statement 3

Quiz 1 Review

PAGE
Class 2 – Income Statement
4
Question 1
Which one of the following statements regarding the balance sheet is false?
a) It is also known as the statement of the financial position

b) It shows the assets and liabilities of a business at a certain point in time

c) It shows the average assets and liabilities of a business over the last
financial period
d) It shows how much the owner(s) has(have) invested in the business

e) It shows the net assets of the organization at the end of the organizations fiscal
year

Class 2 – Income Statement PAGE 5

Question 2
Which of the following is not a characteristic of an asset?
a) It will bring future economic benefits to the business

b) It is owned by the business

c) It can be held by the business for a short period of time

d) It must have a physical substance

e) None of the above

Class 2 – Income Statement PAGE 6

Question 3
Howard’s bakery business has the following account balances at March 30, 2020:
ovens (equipment) $38,000, inventories $4,100, accounts payables $2,650, loan of
$5,000. Howard’s owner’s equity account balance as of March 30, 2021 is:
a) $26,250

b) $39,750

c) $39,450

d) $34,450

e) None of the above

Class 2 – Income Statement PAGE 7

Question 4
Assets Liabilities Owners’ Equity
A No Change Decrease Decrease
B Decrease No change Decrease
C Decrease Decrease No Change
D Increase No Change Increase
A company has an outstanding loan of $5,000. It just paid off $300 of this loan. Use the
chart above and select the effect this transaction had in the financial position of the
company.
a) Line A
b) Line B
c) Line C

d) Line D
e) None of the above

Class 2 – Income Statement PAGE 8

Question 5
Assets Liabilities Owners’ Equity
A Increase Increase No Change
B No Change Decrease No Change
C Increase Increase Decrease
D Decrease Increase Decrease
BET Company bought land of $400,000 by issuing a long term note payable. Use the chart
above and select the effect this transaction had on the financial position of the company.
a) Line A

b) Line B
c) Line C
d) Line D
e) None of the above
Class 2 – Income Statement PAGE 9
Learning Objectives
 Understand the income statement

 Cash accounting vs accrual accounting

 Record income statement related transactions

 Prepare the income statement from the recorded transactions

Class 2 – Income Statement 10

Recent News

https://investors.magnetforensics.com/news/news-details/2021/Magnet-Forensics-Closes-115-Million-
Initial-Public-Offering/default.aspx

The Comprehensive Budget PAGE 11

Income Statement Example

The Comprehensive Budget PAGE 12

Cash vs Accrual
Cash Accounting Accrual Accounting
When you use the cash method you must: When you use the accrual method you must:

• Report income in the fiscal period you receive it • Report income in the fiscal period you earn it, no
• Deduct expenses in the fiscal period you pay them matter when you receive it
• Deduct expenses in the fiscal period you incur them,
whether or not you pay them in that period

Class 2 – Income Statement

 Month 1: You are the owner of MBET Consulting Inc (MC) and you have provided service to Company X and they paid you $2000 in cash. You took $1000 cash and
deposited in your personal account as salary expense.

 Month 2: Service was provided to Company Y and the charge was $4000, but company Y will be paying the service fee in month 3. You again paid yourself $1000
cash as salary expense

 Month 3: You collected the $4000 owed by Company Y. You also received up front payments of $1000 from Company Z which you agree to provide consulting
service in the following month. No salary was paid in this month even though you were working the whole month.

 Month 4: You provided the service to Company Z, and $2000 was paid as your salary of which $1000 was for the amount owed to you in month 3.

Month 1 Month 2 Month 3 Month 4 Month 1 Month 2 Month 3 Month 4

Cash Cash Cash Cash Accrual Accrual Accrual Accrual
Income Statement: Income Statement:

Revenue Revenue

Expense Expense

Net Profit/Loss Net Profit/Loss

Balance Sheet: Balance Sheet:

Cash Cash

A/R A/R

Unearned Revenue Unearned Revenue

A/P A/P
Class 2 – Income Statement
Review of Income Statement Concepts
Assets – Liabilities
or = Owners Equity
Net assets

Permanent Temporary Accounts

Accounts (Operations)

Common/ Retained Treasury Other

AOCI Net
Preferred Earnings Stock Comprehensive
Stock Issues Income Income

Class 2 – Income Statement

In-class Exercise
Which of the following transactions would affect the income statement? Classify the each as revenue, expense,
gain, loss, other income or no impact on net income
1. Paid employees $2,000 for services rendered this period
2. Incurred rent expense of $1,000 but have not yet paid it
3. Sold products to customers for $5,000 who promise to pay within 90 days
4. Paid $500 for an amount owed to the supplier.
5. Sold land for the same amount as its purchase price - $8,500
6. Sold land for $10,000 which is $1,500 more than its purchase price
7. Paid monthly electrical expenses of $400 in cash
8. Purchased equipment for $10,000 in cash.
9. Sold the same equipment just purchased for $9,000
10. Marketable securities you own increased in value by $1,000 but you didn’t sell them.
11. Paid dividends of $1,000
12. Incurred $1000 depreciation charges on equipment
13. Purchased another company whose book value was $60K for $100K.
14. Received a dividend of $800 from a marketable security that you own.
15. Used $300 of supplies that had been purchased earlier
16. Customers who owed money paid $2000
Class 2 – Income Statement
In-class Exercise
With the tight apartment space in Waterloo due to the newly arriving undergraduate and graduate students,
Em(ily) Bet, long term Waterloo resident, spots an opportunity. She decides to open an apartment-locator
business – Fast Apartment Locators. During the first month of operations, April 2021, the following transactions
occurred:
a) Em Bet invests $35,000 of personal funds to start the business.
b) The business purchases, on account, office supplies costing $350.
c) Fast Apartment Locators pays cash of $30,000 to acquire a parcel of land. The business intends to use the land as a future
building site for its business office.
d) Em Bet locates apartments for clients and receives cash revenue of $1,900.
e) The business pays $100 on the account payable created in Transaction (b).
f) Em Bet pays $2,000 from her personal bank account for a vacation with her boyfriend.
g) The business pays cash expenses for office rent, $400, and utilities, $100.
h) The business returns office supplies to the supplier that cost $150. The wrong supplies had been shipped.
i) Em Bet withdraws $1,200 cash from the business for personal use to have a big party

1. Analyze the preceding transactions in terms of their effects on the accounting equation, A = L + OE, of Fast Apartment
Locators.
2. Prepare the balance sheet, income statement and owner’s equity statement for Em Bet’s company after analysing these
transactions

Class 2 – Income Statement