ACC301-ch04

ACC301-ch04 - chapter 4 chapter The Income Statement An electronic presentation by Douglas Cloud Pepperdine University 1 Learning Objectives 1

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1 The The     Income Income     Statement Statement chapter chapter   4 An electronic presentation An electronic presentation by Douglas Cloud by Douglas Cloud Pepperdine University Pepperdine University
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2 1. Define the concept of income. 2. Explain why an income measure is important. 3. Explain how income is measured, including the revenue recognition and expense-matching concepts. 4. Understand the format of an income statement. Learning Objectives Continued
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3 Learning Objectives 5. Describe the specific components of an income statement. 6. Compute comprehensive income and prepare the statement of stockholders’ equity. 7. Construct simple forecasts of income for future periods.
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4 Income per financial capital maintenance: Results only if ending balance of owners’ equity (in monetary units) is greater than beginning balance (in monetary units). When trading a specific item, income equals difference of historical cost and net realizable value. Capital Maintenance
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5 Financial Capital Maintenance Kreidler, Inc. had the following Kreidler, Inc. had the following assets and liabilities at the beginning assets and liabilities at the beginning and at the end of a period. and at the end of a period. Beginning of Period End of Period Total assets $510,000 $560,000 Total liabilities 430,000 390,000 Net assets (owners’ equity) $ 80,000 $170,000 Income is $90,000 Income is $90,000
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6 If the owners invested $40,000 in the If the owners invested $40,000 in the business and received dividends of business and received dividends of $15,000, what would be the income? $15,000, what would be the income? Net assets, end of period $170,000 Net assets, beginning of period 80,000 Increase in net assets $ 90,000 Deduct investment by owners (40,000) Add dividends to owners 15,000 Income $ 65,000 Financial Capital Maintenance
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7 Income per physical capital maintenance: Results only if production capacity at the end of the period exceeds capacity at the beginning of the period. Capacity is measured by replacement cost of net assets. Income/loss is the difference between replacement cost and net realizable valuable. Difference between historical cost and replacement cost is considered a capital maintenance adjustment and not part of income. Physical Capital Maintenance
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8 Assume purchase of a house on January 2, 2000: Purchase price: $ 50,000 Replacement cost (2005) 150,000 Sale price (2005) 175,000 Physical Capital Maintenance
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9 Date Assets Liabilities Equity 1/2/00 1/1/05 $ 50,000 $175,000 -0- -0- $ 50,000 175,000 Change in owners’ equity Change necessary to allow for replacement of home ($150,000 - $50,000) Income $125,000 100,000 $ 25,000 Physical Capital Maintenance
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Why Is a Measure of Income Important? The recognition, measurement,
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This note was uploaded on 06/11/2009 for the course ACC 301 taught by Professor Pendarvis during the Spring '09 term at St. Leo.

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ACC301-ch04 - chapter 4 chapter The Income Statement An electronic presentation by Douglas Cloud Pepperdine University 1 Learning Objectives 1

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