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accounting_chapter3notes - C hapte r 3 Ope rat ing a...

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Chapter 3: Operating a Business and the Income Statement Recognize Operating Activities I ncome Statement Accounts Revenues A business earns revenues when it exchanges its products or services for cash or a customer’s promise to pay cash, called Accounts Receivable. Expenses Cash payments – outflows of money for any purpose, whether to buy equipment, pay off a bank loan, or pay a utility bill. Expenses – costs incurred to generate those revenues o Anything a business uses to generate revenues during a period is an expense, regardless of when it was or will be paid for. o Some of them may result in cash payments at the time they are incurred; others may be incurred before or after cash is paid. Operating Cycle The long-term objective of any business is to turn cash into more cash . If a company is to stay in business, this excess cash must be generated from operations—that is, from the activities for which the business was established—rather than from borrowing money or selling long-lived assets. Companies buy inventory, supplies, and services such as electricity, as well as the work of their employees. Then they sell the inventory or services to customers. Operating (cash-to-cash) cycle – the period that begins when the company pays for its inventory and services and ends when customers pay cash to the company o The length of time for a company to complete its operating cycle depends on the nature of the business Page | 1
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o time period assumption – states that the long life of a company can be reported over shorter periods, such as months, quarters, and years Measure Operating Activities Two issues arise in reporting periodic income to users: 1. Recognition – when should the effects of operating activities be recognized (recorded)?
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