REPORTING THE RESULTS
OF OPERATING ACTIVITIES
Questions, Short Exercises, Exercises, Problems, and Cases:
Answers and Solutions
See the text or the glossary at the end of the book.
Net income equals cash inflows minus cash outflows from operating,
investing, and non-owner (that is, debt servicing) financing activities.
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.
would therefore not differ between the cash and accrual basis.
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.
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.
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.
Revenues measure the inflow of net assets from operating activities and
expenses measure the outflow of net assets consumed in the process of
Thus, recognizing revenues and expenses always
involves a simultaneous entry in an asset and/or liability account.
adjusting entries almost always involve an entry in at least one income
statement and one balance sheet account.
Cost is the economic sacrifice made to acquire goods or services.
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.