Chapter 3 Flashcards
(29 cards)
How do companies keep track of account balances?
Journal entries: express the effects of a transaction on accounts by using the debit-credit framework
T-account: summarize transaction effects for each account and used to determine ending balances
What is the business operating cycle (cash-to-cash) ?
The time it takes for a company to:
- purchase goods or services from suppliers
- pay cash to suppliers
- sell those goods and services to customers
- collect cash from customers
What is the Periodicity Assumption ?
The long life of a company can be reported in shorter periods (months, quarters, and years)
What are the two issues that arise from reporting periodic net earnings ?
- Recognition issues.Whenshould the transactions and their effects of operating activities be recognized, classified, and recorded?
- Measurement issues.What amountsshould be recognized and recorded for the transactions?
What is revenue ?
Increases in assets or settlements of liabilities fromongoing operationsof the business. Operating revenues result from the sale of goods or services.
What are expenses and the two types of expenses?
Expensesare decreases in assets or increases in liabilities from ongoing operations, and are incurred to generate revenues during the period.
- Cost of salesis the cost of products sold to customers. In companies with a manufacturing or merchandising focus, the cost of sales (also calledcost of goods sold) is usually the most significant expense. The difference between sales—net of sales discounts, returns, and allowances—and cost of sales is known asgross profit (or gross margin)
- Operating expensesare the usual expenses, other than cost of sales, that are incurred in operating a business during a specific accounting period. The expenses reported will depend on the nature of the company’s operations
What are non-operating items ?
Any revenues, expenses, gains, or losses that result from these other activities are not included as part of earnings from operations (peripheral activities) but instead categorized as other income or expenses. Example interest income.
What is earnings per share (EPS) and its equation ?
A widely used in evaluating the operating performance and profitability of a company.
Net earnings divided by the average number of shares outstanding during the period.
Truth or False? Losses are decreases in assets or increases in liabilities from peripheral activities.
True
Truth or False? A gain on sale of land causes an increase in income as a result of operating activities.
False
Truth or False? Investors are most interested in income from operations as it best predicts future company performance.
True
Truth or False? Cost of goods sold is usually the largest expense for manufacturing or merchandising companies.
True
Truth or False? Income tax expense will appear on the statement of financial position
False
If a toy manufacturer sold a piece of equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement?
A. In income from discontinued operations
B. In non-operating income
C. In income from asset dispositions
D. In income from operations
B. In non-operating income
If a heavy equipment manufacturer sold heavy equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement?
A. In income from discontinued operations
B. In non-operating income
C. In income from asset dispositions
D. In income from operations
D. In income from operations
What is Cash Basis Accounting and its characteristics ?
- Revenuesare recorded when cash is received and expenses are recorded when cash is paid, regardless of when and revenues are earned, or the expenses are incurred
- Adequate for small businesses, which usually do not have to report to external users
- Postpone or accelerate recognition of revenues and expenses long after or before goods and services are produced and delivered
- Not reflect all assets and liabilities of a company on a particular date
- Not very useful to external decision makers
What is Accrual Accounting and its characteristics ?
- Revenues are recognized when they are earned
- Expenses are recognized when they are incurred
- Regardless of the timing of cash receipts or payments
- Required by IFRS
-Foundations:
Revenue recognition principle
Matching process
What is the Revenue Recognition Principle ?
Revenues are recognized when they are earned.
What are the 5 conditions of revenues ?
- Risks and rewards of owing goods transferred to buyer (Legal title).
- Seller does not manages or controls goods
- Seller’s revenue is readily measurable
- Probable benefits of transaction flow to seller
- All seller’s transaction costs are readily measurable
What are the 5 conditions of revenues ?
- Risks and rewards of owing goods transferred to buyer (Legal title).
- Seller does not manages or controls goods
- Seller’s revenue is readily measurable
- Probable benefits of transaction flow to seller
- All seller’s transaction costs are readily measurable
What is the Matching Process ?
Expenses are recorded when incurred in earning revenue. All of the resources consumed in earning revenues during a specific period must be recognized in that same period
The costs of generating revenue include expenses incurred, such as:
- cost of sales
- wages expense
- utilities expense
- rent expense
- depreciation expense
During 2022, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 2023. The 2022 statement of earnings of the company should report which of the following amounts for service revenues?
$200,000
A company purchased and received $3,500 worth of goods on credit to be sold in their stores. How would the event be recorded?
Dr. Inventory $3,500, Cr. Accounts payable $3,500
Tony’s Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?
May 31
