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Chapter 3 - ACIS 2115 Chapter 3 Reporting Operating Results...

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ACIS 2115 - Chapter 3 Reporting Operating Results on the Income Statement
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3-2 Learning Objective 1 Describe common operating transactions and select appropriate income statement account titles.
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3-3 Revenues and Expenses Revenues are increases in a company’s resources created by sales of goods or services to customers during the period. Expenses are costs of business necessary to earn revenues. Net income is the excess of revenues over expenses. Revenues Printing Revenue 30,950 $ Total Revenue 30,950 Expenses Salaries and Wages Expense 10,100 Rent Expense 3,200 Utilities Expense 500 Insurance Expense 400 Total Expenses 14,200 Net Income 16,750 $ HOKIE PRINTSHOP Income Statement For the Month Ended September 30, 2008
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3-4 Time Period Assumption Revenues Printing Revenue 30,950 $ Total Revenue 30,950 Expenses Salaries and Wages Expense 10,100 Rent Expense 3,200 Utilities Expense 500 Insurance Expense 400 Total Expenses 14,200 Net Income 16,750 $ HOKIE PRINTSHOP Income Statement For the Month Ended September 30, 2008 The time period assumption assumes that the long life of a company can be divided into shorter time periods, such as months, quarters, and years.
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3-5 Cash Basis Accounting Cash basis accounting records revenues when cash is received and expenses when cash is paid.
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3-6 Cash Basis Accounting The cash basis of accounting doesn’t measure financial performance very well when transactions are conducted using credit rather than cash.
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3-7 Learning Objective 2 Explain and apply the revenue and matching principles.
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3-8 Accrual Basis Accounting GAAP Records revenues when they are earned and expenses when they are incurred , regardless of the timing of cash receipts or payments. Accrual Basis Accounting
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3-9 Accrual Basis Accounting Revenues are earned when goods or services are provided to customers at a determined price and with reasonable assurance of collection. Expenses are incurred when the economic benefits of an item are used up in the current period, resulting in a decrease in the company’s resources.
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3-10 Accrual Basis Accounting The revenue principle is a concept that requires that revenues be recorded when they are earned, rather than when cash is received for them. The matching principle is a concept that requires that expenses be recorded in the period in which they are incurred to generate revenue, rather than the period in which they are paid.
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3-11 Timing of Reporting Revenue versus Cash Receipts What if a company receives cash from a customer before the company delivers the good or performs the service?
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