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Lecture04 2010.09.19 PreClass

# Lecture04 2010.09.19 PreClass - Lecture 4 Income Statement...

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Lecture 4 Income Statement: Cash versus Accrual Accounting

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Goals of Today’s Class Better understanding of the Income Statement Better understanding of cash versus accrual accounting Better understanding of Revenues and Expenses recognition How to record Revenues and Expenses
Review of Shareholders’ Equity What is “ contributed capital ”? – The initial investment of owners – e.g., common stock What is “ retained earnings ”? – The cumulative net income of the company that has not been distributed as dividends.

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Accounting for initial public issuance of common stock Very simple if no par value given 1. Debit “Cash” for the amount of the contribution 2. Credit “Common Stock” for the amount of the contribution Example: Sell 2,000 shares for \$8 per share (Debit) Cash \$16,000 (Credit) Common Stock \$16,000 Review of Shareholders’ Equity
Accounting for initial public issuance of common stock More complicated if stock has a stated par value 1. Debit Cash for the amount of the contribution 2. Credit Common Stock for par value only Example: Sell 2,000 shares of “\$1 par common” for \$8 per share (Debit) Cash \$16,000 (Credit) Common Stock (2,000 shs. @ \$1 par) \$2,000 3. Credit Other Paid in Capital for the difference (contribution – par value) (Credit) Other Paid in Capital \$14,000 Review of Shareholders’ Equity

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(1) A t = L t + SE t (2) A t = L t + CC t + RE t (3) A t = L t + CS t + APIC t + Re t (4) A t = L t + CS t + APIC t + RE t (5) A t = L t + CS t + APIC t + NI t - DIV t (6) A t = L t + CS t + APIC t + REV t - EXP t - DIV t Balance Sheet Equation
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 . Income statement accounts are temporary accounts . Net Income = Revenues – Expenses

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Two issues: 1. RECOGNITION – When? 2. MEASUREMENT – What amount? Income Statement
When and how do we identify and measure revenues and expenses? Timing 1. Cash Basis 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 Accounting 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,
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