ch 3 Flashcards
(23 cards)
operating activities
the day to day functionhs involved in running a business - they occur regularly and often have a shorter duration of effects
include buying goods and services from suppliers and emplotees and selling good and services to customersand then collecting the cash`
operating cycle
the periode from buying goods and services through to collecting cash from customers
what is the primary source of revenues and expenses
operating activities
what does the income statement do
it summarizes the financial impact of operating activities undertaken by the company. only reports the financial effects of business activities that occured during just the current period
what are the three main parts to the income statement
revenue, expenses and net income
revenues
amount earned by provifing goods and services to customers
expenses
costs of business necessary to earn revenues. it reports an expense whether or not the payment for the resource has occured
net income
total is calculated by minusing the expenses from the revenue. it summarizes the overall impact of revenues and expenses
its called a great loss when expenses are larger than revenues and a net income if recvenues are greater than expenses
it indicated the amoujnt by which sharebholders equity increases as a result of a company’s profitable operations
time period assumption
the long life of a company is divided into shorter periods, such as months, quarters, and year. this makes it easier to evaluate financial performance
whats the main difference between income statment and balance sheet
revenues and expenses on an income statement report the financial impact od activities in just the current period , whereas items on a balance sheet will continue to have a financial impact beyond the end of the current period. bS accounts are permanent whereas income s acconuts are temporary. BS takes stock of what exsts at a point in time
income s depicts a flow od what happened over a period of time
cash basis eccounting
reports revenues when cash is received and expenses when cash is paid- not allowed to do this in business.
for example. we monitor our financial wellbeing by looking at our bank statements because we pay fro things closely after we buy then. this does not happen in business.
cash basis accounting doesnt measure financial performance very well when transactions are conducted using credit eather than cash. credit delays things
accrual basis accounting
reports revenues when they are eatned and expenses when they are occured regardless od the timing cash receipts or payments
the 2 basic accounting principles that determine when revenues and expenses are recognized uner accrual casis accounting are called the revenue recognistion and expense recognition principles.
revenue recognition principle
revenues should be recognized when thet are earned -recognized means they are recorded in accounting system. earned means the company has filled its obligation to the customer by doing what it promised to do
what follwoing 3 conditions must be met for revue to be recognized
- risk and reawrds have paseed or the eanings process is substantially complete
- measurability is reasonably certain
- collectability is reasonably assured
most businesses meet these conditionals at the point of delivery of goods or services
when can cash be received for goods and services
- cash is received in the same period as the goods and services are provided
- cash is received before is a perid before goods or ervices are provided. common when gift cards are bought. they record the cash received but, since since it hasnt delivered pizza for these customers, no revenue is recorded. this obligation to supply pizza in the future is recorded as an increase in a liability account called uneatned revenue- no impact on income statement- only on bablce sheet in the unearned revenue account
- cash is to be received in a period after foods or services are provided. the right to collect cash in the future is recorded as an increase in an asset account called accounts receivable, no additional recenue is reportyed when the customers payment is received vecause the revenue was alreadty recorded when the pizza was delivered
Expense recofnition (or matching” principle
expenses are recognized in the same perid as the revenues to which they related. it is the timing of the underlying besuness activities not the cash patments that dictates when expenses are recognized
when can cash payments occur
- cash is paid at the same time as the cost is incureed to generate revenue: for example ballons bought are used in the current acocunting period
- cahs is paid before the expense in incurred to generate revenue:for example buying napkins for next month, . under the expense recognition principle the expense from usin these supplies is reportyed next month when the supplies are used to earn revenue: this month they represent an asset,
- cash is paid after the cost is incurred to generate revenue: for example paying for the electricity bill after the electricity was used to generate profit. the BS rewports a corresponding liability celled accounts payable. sismilar sitauations areise when employees woek in the current perood but are not paid their wages until the following period: entered as wage expenses on IS
revenue and expense accounts are subcatagories or
retained earning- t-account found in retained earning-
expenses are found on the debit side (left)and revenues are found on the credit side (left)
+R, +SE
TO indicate that the pizza delieveries increase revenue, which ultimately increases SE
trial balance
used to determine whether the dollar value of
the toral debits equals the dollar value of total credits
it lists every account name in one column and debits and credits are listed
what is it called an unadjusted trial balance
several adjustments will have to be made at the end of the accounting period to update the accounts
net profit margin
indicated how much profit is earned from each doolar revenue. for example net income of 5800 divided by revenues of 15000= 0.37 - 37c of net income from each dolar
net income/ total revenue
income statement limitations
some people think it indicated cash generated
some people think it represents the change in the copanys value
some people think that it inovlves counting when estimation is also involved
