chap003 - Operating Decisions and Operating Decisions and...

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Unformatted text preview: Operating Decisions and Operating Decisions and the Income Statement Chapter 3 Understanding the Business How do business activities affect the income statement? How are these activities recognized and measured? recognized How are these activities How reported on the reported income statement? 3-2 The Operating Cycle Time Period: The long life of a company can be reported over a series of shorter time periods. reported Recognition Issues : When should the effects of operating activities be recognized (recorded)? operating Measurement Issues: What amounts should be recognized? recognized? 3-3 Elements on the Income Statement Revenues Increases in assets or settlement of Increases liabilities from ongoing operations. liabilities Expenses Decreases in assets or increases in Decreases liabilities from ongoing operations. liabilities Gains Increases in assets or settlement of Increases liabilities from peripheral transactions. liabilities Losses Decreases in assets or increases in Decreases liabilities from peripheral transactions. liabilities 3-4 Papa John’s Primary Operating Activity is selling pizza and selling franchises. Operating Activities Peripheral Activities 3-5 Papa John’s Primary Papa Operating Expenses Operating Cost of sales (used inventory) Salaries and Salaries benefits to employees employees Other costs (like Other advertising, insurance, and depreciation) depreciation) 3-6 Earnings Per Share Net Income Weighted Average Number of Common Shares Outstanding 3-7 Corporations are taxable entities. Income tax expense computed as Income Before Income Taxes × Tax Rate (Federal, State, Local and Foreign). 3-8 Cash Basis Accounting Revenue is recorded when cash is received. Expenses are recorded when cash is paid. 3-9 Accrual Accounting Assets, liabilities, revenues, and expenses should be Assets, recognized when the transaction that causes them occurs, not necessarily when cash is paid or received. not Required by Generally Acceptable Accounting Principles 3-10 Revenue Principle Recognize revenues when . . . Delivery has occurred or services have been rendered. There is persuasive evidence of an arrangement for customer payment. The price is fixed or determinable. Collection is reasonably assured. 3-11 Revenue Principle Typical liabilities that become revenue when earned include . . . CASH COLLECTED (Goods or services due to customers) REVENUE over time will (Earned when goods become or services provided) Rent collected in advance Rent revenue Unearned air traffic revenue Air traffic revenue Deferred subscription revenue Subscription revenue 3-12 Revenue Principle If cash is received before the company delivers goods or services, the liability account UNEARNED REVENUE is recorded. Cash received before revenue is earned ­ Cash Received Cash (+A) xxx Unearned revenue (+L) xxx 3-13 Revenue Principle When the company delivers the goods or services UNEARNED REVENUE is reduced and REVENUE is recorded. Cash received before revenue is earned ­ Cash Received Company Delivers Cash (+A) xxx Unearned revenue (+L) xxx Revenue will be recorded when earned. 3-14 Revenue Principle Assets reflecting revenues earned but not yet received in cash include . . . CASH TO BE COLLECTED (Owed by customers) and already e arned as REVENUE (Earned when goods or services provided) Interest receivable Interest revenue Rent receivable Rent revenue Royalties receivable Royalty revenue 3-15 Revenue Principle When cash is received on the date the revenue is earned, the following entry is made: Company Delivers AND Cash Received Cash (+A) xxx Revenue (+R) xxx 3-16 Revenue Principle If cash is received after the company delivers goods or services, an asset ACCOUNTS RECEIVABLE is recorded. Cash received after revenue is earned ­ Company Delivers Accounts receivable (+A) xxx Revenue (+R) xxx 3-17 Revenue Principle When the cash is received the ACCOUNTS RECEIVABLE is reduced. Cash received after revenue is earned ­ Company Delivers Cash Received Accounts receivable (+A) xxx Revenue (+R) xxx Cash will be collected. 3-18 The Matching Principle Resources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid. 3-19 The Matching Principle Typical assets and their related expense accounts include. . . CASH PAID FOR as used over time becomes EXPENSE Supplies inventory Supplies expense Prepaid insurance Insurance expense Buildings and equipment Depreciation expense 3-20 The Matching Principle If cash is paid before the company receives goods or services, an asset account, PREPAID EXPENSE is recorded. Cash is paid before expense is incurred ­ $ Paid Prepaid expense (+A) xxx Cash (­A) xxx 3-21 The Matching Principle When the expense is incurred PREPAID EXPENSE is reduced and an EXPENSE is recorded. Cash is paid before expense is incurred ­ $ Paid Expense Incurred Prepaid expense (+A) xxx Cash (­A) xxx Expense will be recorded when incurred. 3-22 The Matching Principle When cash is paid on the date the expense is incurred, the following entry is made: Expense Incurred AND Cash Paid Expense (+E) xxx Cash (­A) xxx 3-23 The Matching Principle If cash is paid after the company receives goods or services, a liability PAYABLE is recorded. Cash paid after expense is incurred ­ Expense Incurred Expense (+E) xxx Payable (+L) xxx 3-24 The Matching Principle When cash is paid the PAYABLE is reduced. Cash paid after expense is incurred ­ Expense Incurred Cash Paid Expense (+E) xxx Payable (+L) xxx Cash will be paid. 3-25 A = L + SE ASSETS LIABILITIES Debit Credit for for Increase Decrease Debit Credit for for Decrease Increase How Revenues and Expenses affect Retained Earnings. Earnings. CONTRIBUTED CONTRIBUTED CAPITAL CAPITAL RETAINED RETAINED EARNINGS EARNINGS Debit Credit for for Decrease Increase Debit Credit for for Decrease Increase 3-26 Expanded Transaction Analysis Model Dividends decrease Dividends Retained Earnings. Retained RETAINED RETAINED EARNINGS EARNINGS Debit Credit for for Decrease Increase Net Income increases Net Retained Earnings. Retained REVENUES EXPENSES Debit Credit for for Decrease Increase Debit Credit for for Increase Decrease 3-27 How are Financial Statements Prepared? Income Statement Revenues – Expenses = Net Income Statement of Retained Earnings Beginning Retained Earnings + Net Income - Dividends Declared Ending Retained Earnings Balance Sheet Statement of Cash Flows Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings Change = Cash from Operating Activities in + Cash from Investing Activities Cash + Cash from Financing Activities 3-28 Income Statement 3-29 Statement of Retained Earnings PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statement of Retained Earnings For the Month Ended Janaury 31, 2007 (Dollars in thousands) Beginning balance, December 28, 2006 Net income Dividends Ending balance, January 31, 2007 $ $ 147,000 21,800 (3,000) 165,800 The net income comes from the Income The Statement just prepared. Statement 3-30 Balance Sheet The ending balance from The the Statement of Retained Earnings flows into the equity section of the Balance Sheet. Balance PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) Assets Jan. 31, 2007 Current assets: Cash $ 43,900 Accounts receivable 19,200 Supplies 26,000 Prepaid expenses 17,000 Other current assets 14,000 Total current assets 120,100 Long-term investments 2,000 Property and equipment, net of depreciation 207,000 Long-term notes receivable 15,000 Intangibles 67,000 Other assets 17,000 Total assets $ 428,100 Liabilities and Stockholders' Equity Current liabilities: Accounts payable Dividends payable Accrued expenses payable Total current liabilities Unearned franchise fees Long-term notes payable Other long-term liabilities Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 39,000 3,000 73,000 115,000 7,300 110,000 27,000 259,300 3,000 165,800 168,800 428,100 3-31 Focus on Cash Flows Nature of Operating Activity Cash received from: Customers Investments Cash paid to: Suppliers Employees Interest paid Income taxes paid Effect on Cash Flows + + - Cash Outflows Cash Inflows 3-32 Key Ratio Analysis Total Asset Turnover Ratio = Sales (or Operating) Revenues Measures the sales Measures generated per dollar of assets. of Average Total Assets Creditors and analysts use Creditors this ratio to assess a company’s effectiveness at controlling current and noncurrent assets. noncurrent 3-33 ...
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This note was uploaded on 07/15/2011 for the course ACC 360 taught by Professor Marshallhunt during the Spring '09 term at University of Michigan-Dearborn.

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