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ch3slides - Chapter3 theIncomeStatement LearningObjectives...

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Chapter 3 Reporting Operating Results on  the Income Statement
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Learning Objectives 1. Describe common operating transactions and select  appropriate income statement account titles. 2. Explain and apply the revenue and matching principles. 3. Analyze, record, and summarize the effects of operating  transactions, using the accounting equation, journal  entries, and  T-accounts. 4. Prepare an unadjusted trial balance. 5. Describe limitations of the income statement.
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Operating Activities Operating activities include buying goods and services from suppliers and employees and selling goods and services to customers and then collecting cash from them.
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Income Statement Accounts Revenues are increases in a company’s resources created by sales of goods or services to customers during the period. Expenses are resources used up by the entity to earn revenues. Net income is the excess of revenues over expenses.
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Accounting Accrual Basis vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Not GAAP Not GAAP
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Revenues, and expenses should be recognized Revenues, and expenses should be recognized when the transaction that causes them occurs, when the transaction that causes them occurs, not necessarily when cash is paid or received. not necessarily when cash is paid or received. Required by - G enerally A cceptable A ccounting P rinciples Accrual Accounting
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Accrual Accounting To do a “good” job of accrual accounting, we must be  careful on:  Revenue Recognition:  revenue principle When and how to record revenue? Revenues  are  earned  when goods or services are provided to  customers at a determined price and with reasonable assurance  of collection . Expense Recognition:   matching principle  When and how to record expenses? 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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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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Revenue Principle If cash is received before the company delivers  If cash is received before the company delivers  goods or services, the liability account  goods or services, the liability account  UNEARNED REVENUE UNEARNED REVENUE  is recorded.
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