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Lecture04 - Lecture 4 Income Statement Cash versus Accrual...

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1 Lecture 4 Income Statement: Cash versus Accrual Accounting
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2 Goals of Today’s Class Better understanding of Revenues and Expenses Better understanding of the Income Statement Better understanding of cash versus accrual accounting
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3 + - Asset (Debit) (Credit) Liability or Owners’ Equity (Debit) (Credit) + - Retained Earnings Expenses/Losses (Debit) Revenues/Gains (Credit) + + Quick Review of Debits and Credits Memorize this for Assets Flip it for Liabs + OE An increase in an Expense is a decrease in Retained Earnings. (We decrease Owners’ Equity accounts with a debit.) An increase in a Revenue is an increase in Retained Earnings. (We increase Owners’ Equity accounts with a credit.) Remember RE is an Owners’ Equity Account
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4 Review of Shareholders’ Equity What is “ contributed capital ”? – The initial investment of owners – e.g., common stock What is “ retained earnings ”? – The cumulative net income of the company that has not been distributed as dividends.
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5 Peeking Ahead -- Contributed Capital: Common Stock Accounting for initial public issuance of common stock Very simple if stock has no par value Debit Cash for the amount of the contribution Credit Common Stock for the amount of the contribution Example: Sell 2,000 shares of “no par common” for $8 per share (Debit) Cash $16,000 (Credit) Common Stock $16,000
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6 Accounting for initial public issuance of common stock More complicated if stock has a stated par value Debit Cash for the amount of the contribution Credit Common Stock for par value only Example: Sell 2,000 shares of “$1 par common” for $8 per share (Debit) Cash $16,000 (Credit) Common Stock (2,000 shs. @ $1 par) $2,000 Credit Other Paid in Capital for the difference (contribution – par value) (Credit) Other Paid in Capital $14,000 Peeking Ahead -- Contributed Capital: Common Stock
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7 Balance Sheet Equation A t = L t + SE t A t = L t + CS t + APIC t + RE t A t-1 = L t-1 + CS t-1 + APIC t-1 + RE t-1 (A t - A t-1 ) = (L t - L t-1 ) + (CS t - CS t-1 ) + ( APIC t - APIC t-1 ) + ( RE t - RE t-1 ) A = L + CS + APIC + RE A = L + CS + APIC + Net Income - Dividends A = L + CS + APIC + Revenue - Expenses - Dividends
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8 Income Statement Reports Net Income earned by the business over a period of time as a result of its profit-directed activities. Changes in shareholders’ equity due to profit-directed activities during an accounting period . Income statement accounts are temporary accounts . Net Income = Revenues – Expenses
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9 Accrual Accounting Goal is to account for all transactions that economically occurred in the pd. To document fundamental economics, we employ the accrual method The accrual method is best contrasted with the cash method of accounting through an example: On December 29 th , Best Buy sells and delivers an HDTV worth $2,000 Customer purchases the TV using 6 month financing Best Buy prepares its income statement and balance sheet on December 31 st (this assumes a December fiscal year end) Did the sale officially occur in the period even though no cash was received?
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