Chapter 3 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 o The length of time for completion of operating cycle depends on the nature of the business o The operation cycle for Chipotle is relatively short spends cash to purchase fresh ingredients, prepares the food, and sells it to customers for cash o *In other companies, cash is received from customers well after a sale takes place o shortening the operating cycle by creating incentives that encourage customers to buy sooner and/or pay faster improves a company’s cash flows. Accountants follow the time period assumption, which assumes the long life of a company can be reported in shorter time periods to measure income for a specific period of time Two issues arise in reporting periodic income to users: o Recognition issues: When should the effects of operating activities be recognized (recorded)? o Measurement issues: What amounts should be recognized?
The Chipotle Mexican grill has multiple subtotals, such as operating income and income before income taxes this format known as multiple step his very common Operating Revenues: o Revenues: Increases in assets or settlements of liabilities from the major or central ongoing operations of the business o Operating revenues result form the sale of goods or the rendering of services as the central focus of the business o Sometimes if a customer pays for goods or services in advance, a liability account, usually Unearned (or Deferred) Revenue, is created at this point no revenue has been earned Simple a receipt of cash in exchange for a promise to provide a good or service in the future When the company provides the promised goods or services to the customer, then the revenue is recognized and the liability eliminated Operating Expenses: o Expenditure vs. Expenses:
Expenditure is any outflow of cash for any purpose Expenses: Decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period Therefore, not all cash expenditures are expenses, but expenses are necessary to generate revenues o Expenses may be incurred before, after or at the same time as cash is paid When expense incurred, assets such as supplies decrease (used up) or liabilities such as wages payable or utilities payable increase o General and Administrative expenses: General and Administrative Expenses include costs of training employees and managers, advertising and other
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