Chapter03 - CHAPTER 3 Operating Decisions the Income...

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1 CHAPTER 3 Operating Decisions & the Income Statement Acct 2301, Fall 2009 Cox School of Business, SMU Zining Li
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2 Elements of the Income Statement Revenues Cost of goods sold Gross Profit Operating costs and expenses Operating Income Other gains and losses Pretax Net Income Income tax expense Net Income = = = =
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3 Time period assumption Revenue principle: Criteria for revenue recognition Delivery of goods has occurred or services have been rendered Evidence of arrangement for customer payment Price is fixed or determinable Collection is reasonably assured Matching principle: Outlines expense recognition Costs incurred to generate revenues recognized in the same period as revenues Assumptions & Principles of Accounting
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4 Accrual Accounting Required by GAAP Revenues are recognized when earned under the revenue principle, regardless of when cash is received Expenses are recognized when incurred under the matching principle, regardless of when cash is paid Prepaid expenses, unearned revenue Accrual vs. cash-basis accounting
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5 Examples: Recording revenues and expenses 1. Company employees earned $420 in wages during the month of December and will receive their paychecks in January. How much salary expense should the company record in December? 2. The company purchased a one-year insurance policy on January 1 for $1,200. At the end of January, what should the company record as insurance expense?
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