The sale of inventories is recorded in two parts the

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The sale of inventories is recorded in two parts: the revenue part and the expense part. First, the sale is recorded by an increase in both revenues and noncash assets (accounts receiv- able). Revenues increase net income which, in turn, increases earned capital (via retained earnings). Second, the cost of inventories sold is removed from the balance sheet (Apple no longer owns those assets), and is transferred to the income statement as an expense, called cost of goods sold, which decreases both net income and earned capital by $39,541 (again, via retained earnings).
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Module 2 I Overview of Business Activities and Financial Statements Expen- ses "'-..Net Income Balance Sheet Income Statement Cash Asset Noncash + Assets Liabil- ities + Contrib. + Earned Capital Capital n - . 26, 5,263 42,238 = 15,861 8,210 23,430 ) -.- ---.--- --- -----------------·-----·-·----·-------------·----·---·--------l:~---.------.---.-------------.---.------------ ----- = ::ommon +2,458 +2,458 \ Cash = Common = ~::8----------~'=.~;"-------- -= PPE, +2,005 +2,005 I by PPE,net = Lonq-Terrn -long· Debt \ -~ --.- - .. ------------.-.- - .. --- -- .. ----- .. -._--_ .. _ .. _-_ .. __ _ - - ;._----_.---- .. _-----------_ .. __ _ .. _-- .. _--_ .. _----- - +40,137 +40,137 r ~,::~es inventories = Accounts = ~ on Payable -5- ~~n-nnm-~;:~=nnnnnmn--mmm~;i~5Tn:~;;!;~-nnn-m=-:~~,;;~ _ .. _----_ .. _--------------_._-------------_ _ .. -----_ .. __ .. -- ---- - .. - .. -- --~-- -----.- .. - .. -- .. -------------_ .. _ .. _ .. ---_ .. _-- .. _- -39,541 -39,5411 +39,541 -39,541 Inventory _ Retained Costof _ ----------_ ... _-------._.. --------_.__ ..__ ..- .... _---_._ .._.----------------------------------~~~~~~?.: .... _\,--- .. ----.. -----------~-~~~-:-~~~~----.---------------. = = _+=~3 ~~:::= [_____________________________= _ -31,542 Cash = = -9,868 Cash -9,868 Retained Earnings +9,868 -9,868 Operating = Expenses = -'-~ .. ------- .... ---- .. -- .. ---------- .. ----.---- .. -----------------------_._._-_ .. _----------_._---_ .. _----_.(----------_ .. _----------------_._--_ .. _----_ ..... _-----. _ of _ A:;~e~ R~t;i~~d'~ o;e~;i~9 _ -931 ___________ __ ..__ .._~~~~:~:i_~~_ .. .. _ _ .. .. .. __ .. ~~:~:~~.s .\. .. ~~~~~_~~: _ .. ~se assets -18,288 Cash _ 8.288 +18,288 Marketable = Securities = - -=.a:ord -1,027 -1,027 +1,027 -1,027 _j~~~fn~~;nnn:"~:n:nmnmmmn-n-nn~~-fn-nmnm=~~~"-=-=~~5m --~~;}-~~?--.------ ..-------- ..---~.;;;------------------------------------------ .... -----~-;;;-- ..- C-..----- ..-------------- .... ------ ..-..----..-------- .. ::e::rease In Other Accumulated I - Assets Assets - OtherCompo I = Aoel Income \ -_ .. _-_ _._-- ---_ ---------_ .. __ .. _---_ .. _-----------_ - .. _ .. _----_._-_ .. _---- .. _ .. __ ._---------------\_._ .. _ .. _ .. _-_ .. ----------.----------- --- -- ~ OSept.25, 11,261 + 63,922 = 27,392 + 10,668 + 37,123 ! 65,225 - 51,212 = 14,013 reports investment income as an "addback" to other expenses. 2-28 Cash 2,458 CS 2,458 Cash 2,458 I cs 2,458 PPE 2,005 LTD PPE 2,005 2.005 I LTD INV AP I 2.005 40.137 40.137 INV 40.137 I AP I 40.137 AR 65.225 Sales 65,225 AR 65.225 I Sales I 65.225 COGS 39,541 INV 39,541 COGS 39,541 I INV I 39,541 Cash 63,083 AR 63,083 Cash 63,083 I AR I 63,083 AP 31,542 Cash 31.542 AP 31,542 I Cash I 31,542 OE 9,868 Cash 9,868 OE 9,868 I Cash I 9,868 OE 931 ACC OE 931 931 I ACC 931 MS 18,288 Cash 18,288 MS 18,288 I Cash I 18,288 DE 1,027 PPE 1.027 DE 1,027 I PPE I 1,027 Cash 155 01 155 Cash 155 I 01 I 155 OA 320 Aoei 320 OA 320 I AOCI I 320
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2-29 Module 2 I Overview of Business Activities and Financial Statements 5. Collect receivables and settle payables. Apple receives $63,083 million cash from the col- lection of its accounts receivable, thus reducing noncash assets (accounts receivable) by that amount. Apple uses these proceeds to payoff $31,542 of its liabilities (accounts payable and other liabilities). Collecting accounts receivable does not yield revenue; instead, revenue is recognized when earned (see Transaction 4). Thus, recognizing revenue when earned does not necessarily yield an immediate cash increase. 6. Pay cash for expenses. Apple pays $9,868 million cash for expenses. This payment increases expenses, and reduces net income (and earned capital). Expenses are recognized when incurred, regardless of when they are paid. Expenses are both incurred and paid in this transaction. Transaction 7 is a case where expenses are recognized before being paid. 7. Accrue expenses. Accrued expenses relate to expenses that are incurred but not yet paid. For example, employees often work near the end of a period but are not paid until the next period. The company must record wages expense even though employees have not yet been paid in cash. The rationale is that expenses must be recorded in the period incurred to report the correct income for the period. In this transaction, Apple accrues $931 million of expenses, which reduces net income (and earned capital). Apple simultaneously records a $931 mil-
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