1 chapter 3 measuring business income financial & managerial acct (needles/powers/crosson) slide...
TRANSCRIPT
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Chapter 3
Measuring Business Income
Financial & Managerial Acct
(Needles/Powers/Crosson)Slide show (Financial Accounting 4e by Porter and Norton)
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Recognition: formally recording an item in the financial
statements of an entity
Recognition and Measurement
I know I need to record this...
Measurement: quantification of the
effects of the item on the entity
...but at current value or historical
cost?
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Cash vs. Accrual Basis
Cash basis: revenues and expenses are recorded only when cash is received or paid
Accrual basis: revenues are recognized when earned; expenses are recognized when incurred
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Revenue Recognition Principle
Exceptions: Long-Term Contracts - over life of project Franchises - upon substantial performance Commodities - when readily convertible Installment Sales - when cash is collected Rent and Interest - continuously when earned
Revenue is recognized when realized and earned - usually at point of sale.
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Expense Recognition
Income Statement
Inventory
SuppliesPrepaid assets
PP&EIntangibles
as used
Balance Sheet
when sold
over period they provide benefits
ASSETS: EXPENSES:Cost of goods sold
Supplies expenseInsurance expenseRent expense
Depreciation expenseAmortization expense
Other expenses (as incurred)
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Matching Principle
Directly
Indirectlyover period theyprovide benefits
Simultaneouslyupon theiracquisition
e.g. Inventory e.g. Buildings e.g. Utilities
Match Expenses with Associated Revenues
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Deferred Expense - Cash paid before expense is incurred
Examples:» Prepaid rent
& insurance» Office supplies» Plant & equipment
Costs are initially recorded as assets and allocated to expense in future periods
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Deferred Expense Example #1 – Prepay rent on office space for one year on Sept. 1
Initial J/E: Dr. Cr.Prepaid Rent 2,400
Cash 2,400
Monthly adjusting J/E:Rent Expense 200
Prepaid Rent 200($2,400 annual x 1/12 = $200 per mo. for 12 mos.)
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Deferred Expense Example #2 - Purchase delivery truck on January 1 for $21,000. Estimated useful life is 5 years (60 months); estimated salvage value is $3,000.
Initial J/E: Dr. Cr.Delivery Truck 21,000
Cash 21,000
Monthly adjusting J/E:Depreciation Expense 300
Accumulated Depreciation 300 ($21,000 - $3,000) x 1/60 = $300 per mo. for 60
mos.)
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Deferred Revenue - Cash received before revenue is earned
Examples:» Rent collected in advance
» Subscriptions collected in advance
» Gift certificates Receipts are initially recorded as liabilities
(unearned or refundable receipts) and recorded as revenues in future periods when earned.
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Deferred Revenue Example - Receive $2,400 for twelve months rent in advance
Initial J/E: Dr. Cr.Cash 2,400
Rent Collected in Advance 2,400
Monthly adjusting J/E:Rent Collected in Advance 200
Rent Revenue 200( $2,400 annual x
1/12 = $200 per mo. for 12 mos.)
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Accrued Liability - Expense incurred before cash is paid
Examples:» Payroll
» Taxes
» Interest Record expense (and corresponding liability) in
period incurred; pay for it in a future period No cash flow on recording, only when paid
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Accrued Liability Example #1 - Pay biweekly wages of $28,000
At end of month, between pay periods: Dr. Cr.
Wages Expense 4,000
Wages Payable 4,000
Next payday:Wages Payable 4,000Wages Expense 24,000
Cash 28,000
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Accrued Liability Example #2 - Borrow $20,000 for three months. Principal plus 9% interest due at end of loan period.
Initial J/E: Dr. Cr.Cash 20,000
Note Payable 20,000
Monthly adjusting J/E:Interest Expense 150
Interest Payable 150( $20,000 principal x 9% x 3/12 = $450
for 3 months or $450/3 = $150 per month)
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Accrued Asset - Revenue earned before cash is received
Examples:» Rent
» Interest
Record revenue (and corresponding receivable) in period earned; receive payment in a future period
Revenue
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Accrued Asset Example - Rent payment due within first 10 days of month
First day of the month: Dr. Cr.Rent Receivable 2,500
Rent Revenue 2,500
Upon receipt of cash:Cash 2,500
Rent Receivable 2,500
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Steps in the Accounting Cycle
1. Collect and analyze info
2. Journalizetransactions
3. Post J/Es togeneral ledger
4. Preparework sheet
5. Preparefinancial
statements
6. Record &post AJEs
7. Close theaccounts
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Closing Entries
(net loss) or net incomeclosed to retained earnings
Income Summary$xx
from revenueaccounts
$xx from expense
accounts