Chapter 3 - Financial Accounting Chapter 3 Notes Measuring...

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Chapter 3 Author: Anna Rovira Beavers Needles 2008 8/15/08 1 Financial Accounting Chapter 3 Notes Measuring Business Income A. Profitability Pr ofitability is one of the major goals of business. 1. Net Income Is the difference between the money earned from operations, such as selling a product or performing a service, and the expenses incurred to produce revenue. Net income increases stockholder’s equity and is accumulated in Retained Earnings. Think of net income as the amount of money left from your paycheck after paying your bills. You may decide to save that quantity for future use. 2. Revenue: Earnings from operations of the business. By definition revenue are the increases in Stockholders equity resulting from selling goods rendering services or performing other business activities. The exchange of goods or services can be either in Cash or on a promise to pay later. The promise to pay later is recorded in an account called: ACCOUNTS RECEIVABLE, an asset account. 3. Expenses: Expenses are decreases in Stockholders Equity resulting from the cost of selling goods, rendering services, or performing other business activities. Expenses are the cost of doing business. B. The Accounting Period issue To make comparison easier, the time periods are of equal length. Financial statements may be prepared for any time period. Accounting periods of less than a year, for a month, a quarter, etc. are called Interim Periods. The 12-month accounting period used by an organization is called its FISCAL PERIOD. Different organizations may choose different fiscal periods. Some may decide that is more convenient to have their fiscal period to be the same as their customers, i.e. organizations that provide contract services to government. Other may decide to have their fiscal period when their operations at their lowest
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This note was uploaded on 03/10/2011 for the course BUS 1B taught by Professor Kite during the Spring '11 term at Laney College.

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Chapter 3 - Financial Accounting Chapter 3 Notes Measuring...

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