Accounting 215 Chapter 3 Textbook Notes
Accounting 215 Chapter 3 Textbook Notes
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This 3 page Document was uploaded by Joe Pollock on Wednesday April 16, 2014. The Document belongs to a course at University of Washington taught by a professor in Fall. Since its upload, it has received 223 views.
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Date Created: 04/16/14
Accounting 215 Pollock 1 Chapter 3 Notes The Operating Cash to Cash Cycle the time it takes for a company to pay cash to suppliers sell goods and services to customers and collect cash from customers Time Period Assumption indicates that the long life of a company can be reported in shorter time periods Two issues arise in reporting period income to users 1 Recognition when should the effects be recorded 2 Measurement what amounts should be recognized Revenues increases in assets or settlements of liabilities from ongloing operations Example when revenue is earned assets usually cash or accounts receivable increase Expenditure ANY outflow of cash for any purpose Expenses outflows or the using up of assets or increases in liabilities from ongoing operations incurred to generate revenues during the period Operating Revenues Operating Expenses Operating Income income from operations Operating Income a measure of the profit from central ongoing operations Investment IncomeInvestment RevenueInterest RevenueDividend Revenue using excess cash to purchase stocksbonds in other companies Interest Expense any cost of using borrowed money interest Because it is investing and not operating its a different kind of expense Gains are increases in assetsdecreases in liabilities from peripheral transactions Losses are decreases in assetsincreases in liabilities from peripheral transactions Subtotal of operating income income before income taxes pre tax income Income Tax ExpenseProvision for Income Taxes last expense on the income statement before determining net income Cash Basis Accounting records revenues when cash is received and expenses when cash is paid Note using cash basis accounting may lead to an incorrect interpretation of future company performance Financial statements created under cash basis accounting normally Accounting 215 Pollock 2 postponeaccelerate recognition of revenues and expenses long afterbefore goods are produced and delivered They don t reflect ALL assets and liabilities on a given date GAAP requires accrual basis accounting records revenues when 1 Goods or services are delivered 2 There is persuasive evidence of an arrangement for customer payment 3 The price is fixed or determinable 4 Collection is reasonably assured Note the timing of cash receipts from customers does not decide when a business reports revenue Three types of timing 1 BEFORE goods and services delivered gt record no revenue 2 SAME PERIOD gt earned revenue record it 3 AFTER goodsservices delivered gt records both Sales Revenue and Accounts receivable Expense Matching Principle requires that expenses be recorded when incurred in earning revenue BEFORE when revenues are generated in the future the company records an expense for the portion of the cost of the assets used Supplies A Cash A CURRENT incurred and recorded ex operating expensesrepairs expense AFTER recorded as a liability Called Accrued Expenses Payable Notes o Left of equals increase debit Right increase credit o EXCEPT for expenses which increase on the left side of the Taccount debit Every transaction affects 2 accounts Revenues increase STockhoder s Equity through Retained Earnings credit baanceS Recording revenue either increases assets or decreases liabilities Expenses have debit balances Recording an expense means decreasing assets or increasing liabilities Revenues o Increase net income and stockhoder s equity o Increase with credits o Accounts have credit balances Expenses o Decrease net income and stockhoder s equity Accounting 215 Pollock 3 o Increase with debits o Accounts have debit balances Steps 1 Identify the accounts 2 Classify the type of account A L SE Rrevenues Eexpenses 3 Direction does the account increase or decrease Keep in mind that ALE always balances Trial balance gt usually unadjusted not presented to external users Can t use this info until it has been adjusted but we CAN use the net profit margin ratio Net Profit Margin gt Basically this is asking how effective is management in generating profit on every dollar of sales Interpreting a rising net profit margin signifies more efficient management of sales and expenses o Financial analysts expect wellrun businesses to maintain or improve their net profit margin over time Differences in business strategies explain some of the wide variation in the ratio analysis Common Sized Income Statements statements that divide each line on the income statement by net sales Operating Activities 1 Cash from operating sources mainly customers 2 Cash to suppliers and others involved in operations Accounts most commonly associated with Operating Activities gt 0 Current Assets gt accounts receivable inventories prepaid expenses 0 Current Liabilities gt accounts payable wages payable unearned revenue Report these cash flows in Statement of Cash Flows which have 3 categories O Operating Activities I Investing Activities F Financing Activities
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