intermediate accounting Chapter 2

intermediate accounting Chapter 2 - AccrualAccountingand...

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Accrual Accounting and  Income Determination Revsine/Collins/Johnson: Chapter 2
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2 RCJ: Chapter 2 © 2005 Accrual accounting:   The cornerstone of income measurement Under accrual accounting: Revenues are “recognized” (recorded) as soon as they are both: Earned , meaning the seller has performed a service or conveyed an asset to the buyer; Measurable , meaning the value to be received for that service or asset is reasonably assured and can be measured with a high degree of reliability . Expenses are expired costs —the assets used up to produce revenues—and are recorded in the same accounting period in which the revenues are recognized. Expenses are “matched to revenues! Net income = Revenues - Expenses
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3 RCJ: Chapter 2 © 2005 Accrual accounting illustrated February: Buys 2 antique carpets on eBay for $500 cash each. March: Both carpets are sold for $1,200 each. One customer pays cash. The other pays $1,000 down with the remaining amount due next month. April: The credit customer pays the $200 due . February March April Cash Flow ($1,000) $2,200 $200 $2,400 ($1,000) Measurable Expense Revenue Matching
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4 RCJ: Chapter 2 © 2005 Understanding accrual accounting Accrual accounting decouples measured earnings (i.e., revenues minus expenses) from the amount of cash generated from operations. Accrual accounting revenues generally do not correspond to cash receipts for the period, nor do accrual expenses always correspond to cash outlays for the period. Accrual accounting can produce large discrepancies between measured earnings and the amount of cash generated from operations. Accrual earnings is a more accurate measure of the economic value added during the period than is operating cash flow.
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5 RCJ: Chapter 2 © 2005 Canterbury Publishing In January 2005, Canterbury sells a three-year subscription to its quarterly magazine to 1,000 customers. Customers pay the full subscription price ($300 = 12 x $25) up front. Canterbury takes out a $100,000 three-year loan. Interest at 10% per year is payable at maturity in 2007. The cost of publishing and distributing the magazine is $60,000 each year, and is paid in cash at the time of publication. Operating Cash Flow: 2006 2007 2005 Subscriptions $300,000 Loan interests ($30,000) (60,000) Magazine costs (60,000) (60,000)
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RCJ: Chapter 2 © 2005 Canterbury: Cash-basis income Cash-basis entries for 2005: DR Cash $300,000 CR Subscription Revenues $300,000 To record collection of 1,000 three-year subscription at $300 each for Windy City Living. DR Publishing and distribution expenses $60,000 CR Cash 60,000 To record publishing and distribution expense paid in cash. Operating Cash Flow:
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This note was uploaded on 11/18/2010 for the course ACCT act 305 taught by Professor Charles during the Spring '10 term at CUNY Baruch.

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intermediate accounting Chapter 2 - AccrualAccountingand...

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