Kế toán, kiểm toán - Chapter 3: Operating decisions and the income statement

Operating Decisions and theIncome StatementChapter 3Understanding the BusinessHow do business activitiesaffect the income statement?How are these activities recognized and measured?How are these activities reported on theincome statement?The Operating CycleBeginPurchase or manufacture products or supplies on credit.Deliver product or provide service to customers on credit.Pay suppliers.Receive payment from customers.The Operating CycleTime Period: The long life of a company can be reported over a series of shorter time periods.Recognition Issues : When should the effects of operating activities be recognized (recorded)?Measurement Issues: What amounts should be recognized?Elements on the Income StatementLossesDecreases in assets or increases in liabilities from peripheral transactions.RevenuesIncreases in assets or settlement of liabilities from ongoing operations.ExpensesDecreases in assets or increases in liabilities from ongoing operations.GainsIncreases in assets or settlement of liabilities from peripheral transactions.Papa John’s Primary Operating ExpensesCost of sales(used inventory)Salaries and benefits to employeesOther costs (like advertising, insurance, and depreciation)How Are Operating Activities Recognized and Measured?Revenue is recordedwhen cash is received.Expenses are recordedwhen cash is paid.Cash BasisAssets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received.Required by - GenerallyAcceptableAccountingPrinciplesHow Are Operating Activities Recognized and Measured?GAAPAccrual AccountingRevenue PrincipleRecognize revenues when . . .Delivery has occurred or services have been rendered.There is persuasive evidence of an arrangement for customer payment. The price is fixed or determinable.Collection is reasonably assured.Revenue PrincipleTypical liabilities that becomerevenue when earned include . . .Revenue PrincipleAssets reflecting revenues earned butnot yet received in cash include . . .The Matching PrincipleResources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid.The Matching PrincipleTypical assets and their relatedexpense accounts include. . .A = L + SEASSETSDebit for IncreaseCredit for DecreaseLIABILITIESDebit for DecreaseCredit for IncreaseRETAINED EARNINGSDebit for DecreaseCredit for IncreaseCONTRIBUTED CAPITALDebit for DecreaseCredit for Increase Next, let’s see how Revenues and Expenses affect Retained Earnings.EXPENSESDebit for IncreaseCredit for DecreaseREVENUESDebit for DecreaseCredit for IncreaseRETAINED EARNINGSDebit for DecreaseCredit for IncreaseExpanded Transaction Analysis ModelDividends decrease Retained Earnings.Net Income increases Retained Earnings.End of Chapter 3