Financial Accounting Exam Review

Financial Accounting Exam Review - Cody Brouwers December 6...

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Unformatted text preview: Cody Brouwers December 6 th , 2009 P a g e | 1 Financial Accounting Exam Review Chapter 5 – I ncome Measurement and the Income Statement The Revenue Recognition Principle • Revenues – Increases in economic resources resulting from ordinary activities such as the sale of goods, rendering of services, or use of other entity’s resources. • Revenue recognition principle – Revenues are recognized in the income statement when they are earned. o Time-of-sale method – The method used by merchandising and manufacturing industries to recognize revenue when goods are sold. o Percentage-of-completion method – The method used by contractors to recognize revenue before the completion of a long-term contract. o Production method – The method in which revenue is recognized when a commodity is produced rather than when it is sold. o I nstalment method – The method in which revenue is recognized at the time cash is collected. The Matching Principle and Expense Recognition • Matching Principle – The revenues for the period are associated with the costs of generating those revenues. o Certain costs directly generate revenues, so they can be directly matched with them. o Other costs indirectly generate revenues, so they are matched with the periods they provide benefit. Cody Brouwers December 6 th , 2009 P a g e | 2 o Other costs do not give rise to assets because no future benefits from these costs are discernible, like the cost of heating and lighting. Thus they are treated as expiring immediately as they are acquired. o Unexpired Costs are called assets, expired ones, expenses. The Format and Content of the Income Statement • Single-step income statement – An income statement in which all expenses are added together and subtracted from all revenues. Advantage is that it’s simple, but doesn’t classify revenues and expenses or associate them with anything. • Multiple-step income statement – An income statement that shows classifications of revenues and expenses as well as important subtotals. o Net Sales – Sales revenue less sales returns and allowances and sales discounts. o Gross Profit – Sales less cost of goods sold, also termed gross margin. Total sales revenue $368,00 Less: Sales returns and allowances 6,000 Sales discounts 4,500 Net sales $357,50 Cost of goods sold 218,300 Gross Profit $13 9,2 00 o Sales Returns and Allowances – Contra-revenue account (Shareholder’s Equity) used to record both refunds to customers and reductions of their accounts. Example of someone returning a $25 shirt: Cody Brouwers December 6 th , 2009 P a g e | 3 Apr. 25 Sales Returns and Allowances 25 Cash 25 To record return of stained T-shirt by customer for cash refund Contra-revenue account – Has a balance opposite to its related account, and is deducted from that account on the statement. Thus the effect of this debit to this account is the same as if Sales Revenue had been reduced (debited) directly. A “ Shareholder’s Equity...
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This note was uploaded on 08/05/2011 for the course ACCT 100 taught by Professor Adamscott during the Spring '11 term at Ryerson.

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Financial Accounting Exam Review - Cody Brouwers December 6...

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