Chapter 2 - Accrual Accounting and Income Determination...

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Unformatted text preview: Accrual Accounting and Income Determination Learning Objectives What is revenue recognition principle under the accrual-basis accounting? How to apply the matching principle to expense recognition under the accrual-basis? . How is income measured under the accrual- basis? What is the cash-basis accounting? 1 Learning Objectives (Contd.) What are the distinctions between cash- basis and accrual-basis earnings? Why is accrual-basis income generally a better measure of operating performance? Income statement format and classification. How to report a change in accounting principle, accounting estimate, and accounting entity. What is comprehensive income? 2 Learning Objectives : What is the revenue recognition principle under the accrual-basis accounting? How to apply the matching principle to expense recognition under the accrual- basis? . How is income measured under the accrual-basis? 3 Measuring Profit ( Net income) Performance: When to recognize revenues and expenses under the GAAP (the accrual-basis)? Step 1: Revenuer ecognition Step 2: Expense matching Step 3: Income Recognition Net income = Revenues - Expenses Operating Cycle Market the product Collect cash Deliver product Manufacture product Order material Negotiate production contract Receive order 4 Accrual Basis Accounting Income Measurement Step1: Revenues are recognized (recorded) when: Earned : The seller has performed a service or conveyed an asset to the buyer; and Measurable (Realizable ): The value to be received for that service or asset can be measured with a high degree of reliability and the collection is reasonably assured. Step 2: Expenses are matched to revenues. Step 3: Net income = Revenues - Expenses 5 Step 1: Determine the amount of revenue to be recorded (revenue recognition). Condition 1: The critical event in the process of earning the revenue has taken place. (Earned) Condition 2: The amount of revenue that will be collected is reasonably assured and is measurable with a reasonable degree of reliability. (Measurability) Time of sale is used in most industries 6 Matching Principle: if revenues are recognized in x1 period, all related expenses (including both traceable and period costs) should be recognized in the same period. Step 2: Matching expenses with revenues 7 Traceable costs : The costs which can be easily traced to the revenues. These traceable costs also called product costs (i.e., the cost of goods sold). Period costs : These costs are more difficult to quantify their contribution to revenues of a particular period....
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Chapter 2 - Accrual Accounting and Income Determination...

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