04IncomeStatementandStatementofCashFlows

04IncomeStatementandStatementofCashFlows - Intermediate...

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Intermediate Financial Accounting I The Income Statement and Statement of Cash Flows
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2 Objectives of the Chapter 1. Study the content of an income statement . 2. Study the reporting of comprehensive income. 3. Prepare a retained earnings statement. 4. Discuss the quality of earnings, earnings management and limitations of the income statement. 5. Study the content of a statement of cash flows.
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3 Income Measurement a. Capital Maintenance Approach Income = Net assets changes adjusting for additional investments from owners and dividends. b. Accounting Measurement of Income (transaction approach) = Revenues- Expenses + Gains - Losses
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4 Definition of Elements of Accounting Income Measurement 1.Revenues: inflows or increases of assets or decreases of liabilities from activities related to the major operation of a business entity; will eventually increase stockholders’ equity (i.e., sales revenue). .
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5 Revenue Recognition Principle (SFAS No. 5) (-An Accrual Basis) Revenue is recognized when it is earned and realizable. Earned : the entity has substantially accomplished what it must do to be entitled to compensation (i.e., service has been performed or goods conveyed). Realizable : the revenue can be measured with certain degree of reliability and the collection is reasonably assured). In general, these conditions are met at time of sale (delivery) or when services are rendered.
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6 Revenue Recognition Principle Other conditions for revenue recognition (Staff Accounting Bulletin No. 101(1999)): Persuasive evidence of a sale. Price is fixed or determinable. Collectibility is reasonably assured. Delivery has occurred or services have been rendered.
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7 Definition of Elements of Accounting Income Measurement (contd.) 2. Expenses: outflows or decreases of assets or increases of liabilities of a business entity from activities related to the major operation of a business entity; will eventually decrease stockholders’ equity. Recognition Principle: matching principle.
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8 Matching Principle – An Accrual Basis If revenues are recognized in x1 period, all related expenses should be recognized in the same period.
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Traceable costs such as product costs can be easily traced to revenues and can be matched with the revenues in a period . Period costs : These costs are more difficult to quantify their contribution to specific revenues of a particular period. Thus, period costs are expensed in the period when they are consumed or occurred . (e.g., advertising exp., interest and rent exp .) Matching Expenses with Revenues 9
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10 Matching Expenses with Revenues (contd.) Other costs related to revenue but are not easily traceable to revenues. These other costs required allocation or
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This note was uploaded on 09/08/2011 for the course ACCOUNTING 301 taught by Professor Hsieh during the Spring '11 term at S.F. State.

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04IncomeStatementandStatementofCashFlows - Intermediate...

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