Ch_03

Ch_03 - CHAPTER 3 INCOME STATEMENT: REPORTING THE RESULTS...

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3-1 Solutions CHAPTER 3 INCOME STATEMENT: REPORTING THE RESULTS OF OPERATING ACTIVITIES Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 3.1 See the text or the glossary at the end of the book. 3.2 Net income equals cash inflows minus cash outflows from operating, investing, and non-owner (that is, debt servicing) financing activities. If the period were long enough, then sales of goods and services (revenue under the accrual basis) and cash receipts from customers (revenue under the cash basis) would both occur in the same long-enough time period. Revenues would therefore not differ between the cash and accrual basis. Likewise, costs incurred to generated revenues (expenses under the accrual basis) and cash expenditures for goods and services consumed (expenses under the cash basis) would both occur in the same period. Expenses would also not differ between the cash and accrual basis. With the same amounts of revenues and expenses, net income on an accrual basis would equal net income on a cash basis. 3.3 The amount of revenue recognized equals the amount of cash the firm expects to collect from customers. The firm does not necessarily recognize the revenue, however, at the time it receives the cash. It typically recognizes revenue at the time of sale even though it has not yet collected cash from customers. Likewise, the amount of expense recognized equals the cash disbursement made for equipment, materials, labor, and so forth. However, the firm recognizes the expense when it consumes the services of these factor inputs, not when it makes the cash expenditure. 3.4 Revenues measure the inflow of net assets from operating activities and expenses measure the outflow of net assets consumed in the process of generating revenues. Thus, recognizing revenues and expenses always involves a simultaneous entry in an asset and/or liability account. Likewise, adjusting entries almost always involve an entry in at least one income statement and one balance sheet account. 3.5 Cost is the economic sacrifice made to acquire goods or services. When the good or service acquired has measurable future benefits to a firm, the cost is an unexpired cost, or an asset. When the firm consumes the good or service, the cost is an expired cost, or expense.
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Solutions 3-2 3.6 Accrual accounting attempts to relate inputs with outputs to obtain a measure of the economic value added by a firm’s operating activities. Accrual accounting recognizes expenses in the same period as related revenues. Costs not closely related to particular revenues become expenses in the period when the firm consumes the services of assets in operations. Thus, expenses either match with particular revenues or with a particular accounting period.
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Ch_03 - CHAPTER 3 INCOME STATEMENT: REPORTING THE RESULTS...

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