Lecture04

# Lecture04 - Lecture 4 Income Statement Recall that...

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Lecture 4 Income Statement

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Recall that… Contributed Capital: Initial investment of owners Retained Earnings is a component of Shareholders’ Equity It is the amount by which the investment of shareholders has increased as a result of past operations
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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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 . Temporary accounts Net Income = Revenues – Expenses
When and how do we identify and measure revenues and expenses? Timing 1. Cash Basis associates REVENUES with the increase in cash resulting from the sale of goods or services, and EXPENSES with the decrease in cash associated with sales activities. Period 1 Period 2 Period 3 Period 4 Purchase inventory for resale, on credit, Cost = \$10 Pay supplier \$10 Sell and deliver inventory on credit, Price = \$20 Collect \$20 from customer

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Calculating Net Income using cash basis Net Income = Revenues - Expenses = Cash Received - Cash Paid Period 1 = - Period 2 = - Period 3 = - Period 4 = - 0 0 -10 0 0 10 0 0 0 20 20 0
What is the downside to Cash Basis?

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## This note was uploaded on 05/20/2010 for the course ACCT 101 taught by Professor Briancadman during the Spring '10 term at Penn College.

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Lecture04 - Lecture 4 Income Statement Recall that...

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