chp 4 - CHAPTER 4 We are relying on Bastion Co information...

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1 CHAPTER 4 We are relying on Bastion Co information. Life Cycle of a Business Start up 7/1 Future Point Accounting Period 7/31 Revenues are recorded when earned: Earnings process is complete Cash collection is reasonably certain Cash 30,000 Accounts receivable 170,000 Sales revenues 200,000 Revenues 7/1 7/31 Accounting Period Revenues Earned $200,000 Expenses Realized $168,000 Expenses are recorded when: Cash is paid A liability is incurred Cost of an asset expires
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2 7/1 7/31 Accounting Period Revenues Earned $200,000 = Net Income $32,000 Expenses Realized $168,000 Matching Principle Revenues Earned During the Period $200,000 _ Expenses Realized During the Period $168,000 Net Income $32,000 = In determining net income, ALL expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues. Key Concepts Revenues - Expenses = Income Revenue Recognition Revenue is recognized (recorded) when: The earnings process is complete and an exchange transaction has occurred The transaction is measurable in $ terms. Consider the following: McExample Franchise fees owned to the parent corporation based on % of sales for the current month have not as yet been paid. Cash is paid for the products sold in the company operated restaurants. Has the parent company earned revenue even though cash has not been received? Has the company earned revenue?
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3 Non-McExamples Carnival Cruise Line Receives advance payments from customers. Are the advance payments revenue? Delta Airlines Delta Airlines records advance bookings of passenger ticket sales. At what point should Delta recognize revenue? Vail derives revenues from a variety of sources. These include sales of season passes, lift ticket sales, and ski lessons to mention a few. At what point should revenues be recognized in each instance? Vail Ski Resorts
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4 Marvel Entertainment distributes trading cards and comic books. Subscription revenue is received in advance. At what point should Marvel recognize the trading card and subscription revenue? Marvel Entertainment ADJUSTING ENTRIES Unrecorded Revenues Assume that Scrooge holds the note on which $4,500 of interest has accrued. Thus, he has interest revenue that has been earned but is unrecorded. The adjusting entry is: Interest Receivable Interest Revenue Services are provided only if two months payments are paid in advance. Collections made in advance on December 1 totaled $40,000. Fiscal year ends 12/31. Through the adjusting entry, revenues that are earned up to the end of the fiscal year are properly included in income. 12/1 Cash 40,000 Unearned revenue 40,000 The adjusting entry at 12/31. Fiscal year end 12/31 1 / 31/ 2007 Remaining revenue is earned.
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