Mgmt 200 Spring 2011 Chapter 3

Mgmt 200 Spring 2011 Chapter 3 - 1/30/2011 1 The Financial...

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Unformatted text preview: 1/30/2011 1 The Financial Reporting Process: Accrual Accounting, Adjusting and Closing Entries, The Financial Reports. Chapter 3 Revenue and Expense Reporting Revenue Recognition Principle Revenues recognized when (a) realized or realizable, and (b) earned. Matching Principle Matching Principle Expenses incurred to generate recognized revenue be recognized in the same period. Net income (revenue expenses) is NOT cash flow from operations. Cash versus Accrual basis Cash basis net income Revenues and expenses recognized only when cash is received or paid. Treatment of long-term assets Equal to Cash Flow from Operations (CFO) Accrual basis net income Revenues are recognized when earned and expenses are recognized when incurred (Matching principle). 1/30/2011 2 Revenue Recognition Principle Recognize revenue when it is earned o Calvin books a cruise with Carnival Cruise Lines, the worlds largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April 2013. o When does Carnival report revenue from the ticket sale? Matching Principle Expenses are reported with the revenues they help to generate 1/30/2011 3 LO2 AccrualBasis Compared with CashBasis Accounting Exercise 3-5 During the course of your examination of the financial statements of Trojan Corporation for the year ended December 31, 2012, you come across several items needing further consideration. Currently, net income is $90,000. a. An insurance policy covering 12 months was purchased on October 1, 2012, for $18,000. The entire amount was debited to prepaid insurance and no adjusting entry was made for this item in 2012. b. During 2012, the company received a $3,000 cash advance from a customer for services to be performed in 2013. The $3,000 was incorrectly credited to service revenue. c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing $2,250 were on hand at December 31, 2012. d. Kramer borrowed $60,000 from a local bank on September 1, 2012. Principal and interest at 12% will be paid on August 31, 2013. No accrual was made for interest in 2012. Required: Using the information in a through d above, determine the proper amount of net income as of December 31, 2012. The Accounting Cycle During period Analyze transactions Record journal entries Post amounts to the general ledger At end of period At end of period Adjust revenues and expenses for unrecorded items Prepare financial statements Close revenue, expense, and dividend accounts and update the retained earnings account Repeat for next period 1/30/2011 4 The Accounting Cycle A 1 = L 1 + CC 1 +RE 1 Start of year balance sheet A 2 = L 2 + CC 2 +RE 1 + Rev* 2 Exp* 2- Div 2 After this years transactions have been processed A 2 = L 2 + CC 2 +RE 1 + Rev 2 Exp 2- Div 2 After adjusting entries to correct revenues and expenses...
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This note was uploaded on 02/27/2012 for the course MGMT 200 taught by Professor Greigg during the Spring '08 term at Purdue University-West Lafayette.

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Mgmt 200 Spring 2011 Chapter 3 - 1/30/2011 1 The Financial...

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