Chapter_3_Power_Point - Chapter 3 Measuring Business Income...

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Chapter 3 “Measuring Business Income”
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LO 1 – Define Revenues, Expenses, and Net Income Profitability? “The ability [of a company] to earn enough income to attract and hold investment capital.” (p. 29) Liquidity and profitability are the two major goals of business enterprises. Liquidity is “Having enough cash available to pay debts when they are due.” (p. 28)
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LO 1 The term “profit” has many meanings, depending on who uses it (economists, lawyers, accountants, etc.) and how it is used. Gross vs. net Gross (the total) Net (the remainder, the “clean of,” i.e. after some deduction)
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LO 1 An envelope weighs 0.5 g. The paper inside it weighs 2 g. The gross weight of your package is 2.5 g. The net weight of what you are trying to mail is 2 g. Gross ……. 2.5 g - ……. - 0.5 Net ……… 2.0 g
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LO 1 Accountants prefer to use the word “Net Income” (also called by finance people and accountants Earnings) rather than “profit.” Gross Profit (or Gross Margin) = Net Sales – COGS (See p. 175. Watch out. “Gross” may have different meanings.) Example…
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LO 1 Net Income is the increase in owner’s equity that results from the operations of a company. (see p.110) Often times, the OE account is used synonymously with the Capital account.
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LO 1 Revenues - Expenses Net Income (if positive) or Net Loss (if negative)
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LO 1 When a company earns revenue , it usually: a) Receives cash: (DR) Cash XXX (CR) Sales Revenue XXX a) Receives a promise to be paid in the future: (DR) AR or NR XXX (CR) Sales Revenue XXX
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LO 1 Liabilities are usually not affected by revenues (That is, they are rarely in a JE together). However, this may be possible. For example : We sold a service or a product to some other party. Rather than paying us cash or giving us a promise to pay later, the other party agrees to forgive us an obligation (liability) we have toward that other party.
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LO 1 (DR) AP or NP 1,000 JE represent +/- changes. (CR) Sales Revenue 1,000 A = L + OE Change down up b.b. 9,000 = 5,000 + 4,000 Change -1,000 + 1,000 e.b. 9,000 = 4,000 + 5,000
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LO 1 Expenses are decreases in OE resulting from operations . Also called “costs of doing business” and “expired costs.” Examples of expenses: - COGS (Cost of Goods Sold). Also called in a more general sense, Cost of Sales - Wages Expense, Rent Expense, Utilities Expense ( but not Prepaid Expense; Prepaid Expense is a synonym for a Prepaid Asset like Prepaid Insurance or Prepaid Rent).
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LO1 By the way, another misnomer was
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This note was uploaded on 12/14/2009 for the course BUSINESS bus 203c taught by Professor Milankas. during the Spring '09 term at American University in Bulgaria.

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Chapter_3_Power_Point - Chapter 3 Measuring Business Income...

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