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pptChapter3 - 3-1UCSB AndersonThe Accounting ProcessChapter...

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Unformatted text preview: 3-1UCSB AndersonThe Accounting ProcessChapter 33-2UCSB AndersonCash Basis versus Accrual Basis Accounting3-3UCSB AndersonThe Income Statement report the revenuesand expensesof a firm, for a particular period of time, stated according to the accrual basis ACCRUAL BASIS of accounting.Measuring IncomeThe objective of preparing an income statement is to obtain a measure of operating performance that matches a firms outputs (revenues) with the associated inputs (expenses).3-4UCSB AndersonCash Basis versus Accrual Basis of AccountingCash Basis (A COMPREHENSIVE BASIS OF ACCOUNTING THAT IS NOT GAAP):Revenueis recorded only when the cash is received and,expensesare recorded only when the cash is paid.Accrual Basis: (GAAP)Recognizing revenuewhen it is earned, without regard to when the cash is received, and recognizing expenseswhen associated benefit (revenue) is recorded; also known as the matching principle. Statement of cash flows fills in the gap!FASB and SEC are currently making this very complex. Quote from the CFO at one of my SEC registrants: Revenue MAYBE when cash is received and expenses immediately. SAB 101NOTE: They are THE SAME in the long-term. Also the timing of recording revenues and expenses under GAAP is a primary objective of high-level accounting.3-5UCSB AndersonLAB EXERCISESI strongly recommend that you begin working on your lab exercises at home now. 3-6UCSB AndersonCash Basis versus Accrual Basis ExampleSeminis, Inc. had the following transactions: zIn September 2000, Seminis purchased seed inventory for $18,000 on credit. Seminis paid the suppliers invoice in September2000. zIn October 2000, Seminis sold the seed for $35,000 on credit. zIn November 2000, the customer paid the $35,000 due Seminis.Compute the net income for September, October, and November under cash basis accounting and accrual basis accounting.3-7UCSB AndersonCash Basis versus Accrual Basis Example$ 35,000 $ 35,000$ (18,000)$ 35,000$ 17,000(18,000)$ 17,000$ 17,000$ 35,000 $ 35,000(18,000)(18,000)(18,000)Sept.Oct.Nov.TotalSept.Oct.Nov.TotalCash Basis AccountingRevenuesExpensesNet income (loss)Accrual Basis AccountingRevenuesExpensesNet income (loss)Seminis Inc.3-8UCSB AndersonCash Basis versus Accrual Basis ExampleUC Construction signs an agreement to construct a garage for $22,000. zIn January, UC Construction begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. zIn February, UC Construction collects $22,000 cash from the customer. zIn March, UC pays the $18,000 due the creditors.Compute the net incomes for each month under cash basis accounting and accrual basis accounting.3-9UCSB AndersonCash Basis versus Accrual Basis Example$ 22,000(18,000)$ 22,000$ 22,000$ (18,000)$ 4,000(18,000)$ 22,000$ 4,000(18,000)$ 4,000$ 22,000(18,000)JanuaryFebruaryMarchTotalJanuaryFebruaryMarchTotalCash BasisRevenueExpenseNet IncomeRevenueExpenseNet IncomeUC Construction Income StatementAccrual Basis3-10UCSB...
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pptChapter3 - 3-1UCSB AndersonThe Accounting ProcessChapter...

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