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CHAPTER 4
DISCUSSION QUESTIONS

Q4-1. The five parts are:
(a) Direct materials section
(b) Direct labor section
(c) Factory overhead
(d) Work in process inventories
(e) Finished goods inventories
Q4-2. The balance sheet is a statement of financial position; the income statement is a statement of activity. The income statement is complementary to the balance sheet, accounting in particular for the change in the proprietary equity as a result of operations during the year.
In that respect, the income statement is essentially nothing more than a major section of the retained earnings account. Therefore, the revenue and expense accounts in the income statement have been termed “explanatory” accounts, explaining the ebb and flow of revenues and expenses that lead to the new income (or loss) and to the new retained earnings balance in the balance sheet.
Q4-3. The ordinary balance sheet and income statement are intended to provide information as to financial position and results of operation of a business, in accordance with several assumptons that are made in preparing the statements. From the standpoint of the criticisms made, the most important of these assumptions are that cost less appropriate amortization of cost measures unexpired cost, and that a business may be assumed to be going to continue operations indefinitely into the future. Accounting statements are usually prepared on the theory that a sale or some other definite event is essential before revenue is recognized.
Basically, the asset side of a balance sheet contains a presentation of the amounts of cost incurred, which can be presumed to benefit future periods. An income statement presents the amount of revenue recognized as having been realized during the period less the