review03 - CHAPTER 3 Measuring Business Income 0REVIEWING...

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CHAPTER 3 Measuring Business Income 0REVIEWING THE CHAPTER Objective 1: Define net income , and explain the assumptions underlying income measurement and their ethical application. 10. Profitability, or earning a profit, is a very important business goal. A major function of accounting is to measure and report a company’s success or failure in achieving this goal. This is done by preparing an income statement that shows a company’s net income or net loss. 20. Net income is the net increase in owner’s equity that results from a company’s operations. Net income occurs when revenues exceed expenses; if expenses exceed revenues, a net loss occurs. 30. Revenues are increases in owner’s equity resulting from selling goods, rendering services, or performing other business activities. The revenue for a given period equals the total cash and receivables from goods and services provided to customers during the period. 40. Also described as the cost of doing business or as expired costs, expenses are the costs of goods and services used in the process of earning revenues. Examples of expenses are Telephone Expense, Wages Expense, and Advertising Expense. Expenses decrease owner’s equity; typically, they also result in an outflow of cash or the incurrence of a liability. 50. Not all increases in owner’s equity arise from revenues, nor are all decreases in owner’s equity produced by expenses. Similarly, not all increases in cash arise from revenues, nor are all decreases in cash produced by expenses. 60. The issue of continuity addresses the difficulty of allocating certain expenses and revenues over several accounting periods when one cannot be certain how long the business will survive. Unless there is evidence to the contrary (such as an imminent bankruptcy), the accountant assumes the business is a going concern —that it will continue to operate indefinitely. 70. Another difficult accounting issue is the assignment of revenues and expenses to a short period of time. In dealing with this problem, accountants make an assumption about periodicity —that is, that while measurements of net income for short periods are approximate, they are nonetheless useful estimates of a firm’s profitability for the period. To make the comparison of income statements easier, the accounting periods are usually of equal length. Accounting periods of less than a year are called interim periods. A fiscal year covers any 12-month accounting period. Many firms use a fiscal year that corresponds to a calendar year, the 12-month period ending on December 31. Others choose a fiscal year that corresponds to their yearly business cycles and ends during a slow season. The financial statements should always show the time period covered. 80.
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This note was uploaded on 06/10/2009 for the course ACG 2021 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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review03 - CHAPTER 3 Measuring Business Income 0REVIEWING...

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