Chapter 3 lecture - ACTG210 Chapter3 LeighSalzsieder 1 How...

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ACTG 210 Chapter 3 Leigh Salzsieder 1
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Understanding the Business How do business activities affect the income statement? How are these activities recognized and measured? How are these activities reported on the income statement? 2
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The Operating Cycle Begin Purchase or manufacture products or supplies on credit. Deliver product or provide service to customers on credit. Pay suppliers. Receive payment from customers. 3
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The Operating Cycle Time Period: The long life of a company can be reported over a series of shorter time periods . Recognition Issues : When should the effects of operating activities be recognized (recorded)? Measurement Issues: What amounts should be recognized? 4
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Elements on the Income Statement Losses Decreases in assets or increases in liabilities from peripheral transactions. Revenues Increases in assets or settlement of liabilities from ongoing operations. Expenses Decreases in assets or increases in liabilities from ongoing operations. Gains Increases in assets or settlement of liabilities from peripheral transactions . 5
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6
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Papa John’s Primary Operating Expenses Cost of sales (used inventory) Salaries and benefits to employees Other costs (like advertising, insurance, and depreciation) 7
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How Are Operating Activities Recognized and  Measured? Revenue is recorded when cash is received. Expenses are recorded when cash is paid. Cash Basis 8
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Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received. Required by - G enerally A cceptable A ccounting P rinciples How Are Operating Activities Recognized and  Measured? GAAP Accrual Accounting 9
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Revenue Principle Recognize revenues when . . . l Delivery has occurred or services have been rendered. l There is persuasive evidence of an arrangement for customer payment. l The price is fixed or determinable. l Collection is reasonably assured. 10
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Revenue Principle If cash is received before the company delivers  goods or services, the liability account  UNEARNED REVENUE  is recorded. Cash received before revenue is earned - Cash Received Cash (+A)                           xxx    Unearned revenue (+L)              xxx 11
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Revenue Principle When the company delivers the goods or services  UNEARNED REVENUE  is reduced and 
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Chapter 3 lecture - ACTG210 Chapter3 LeighSalzsieder 1 How...

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