Period are both reflected in the following template

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period, are both reflected in the following template, Balance Sheet '<, Net Income Cash Transaction Asset Liabil- -I' Con!rib. ities Capital s + Period 1: Accrue $100 wages expense and liability +100 Wages Payable -100 Retained Earnings +100 -100 Wages = Expense Period 2: Pay $100 cash for wages -100 Cash -100 = Wages Payable = ________ . ~ L _ Wages expense is recorded in period 1's income statement because it is incurred by the company and earned by employees in that period. Also, a liability is recorded in period 1 reflecting the company's obligation to make payment to employees. In period 2, the wages are paid, which means that both cash and the liability are reduced, To illustrate the accrual of revenues, assume that Apple is performing work under a long-term contract that allows it to bill the customer periodically as work is performed. At the end of the
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Module 2 I Overview of Business Activities and Financial Statements 2-26 nt period, it determines that it has earned $100,000 per contact. The accrual of this revenue its subsequent collection are recorded as follows ($ OOOs): = r Balance Sheet In'come Statement ""- Net Income Cash Asset + Noncash Assets Liabil- + Contrib. + ities Capital Rev- enues Expen- ses crual 00 Accounts = Retained ~ earned Receivable Earnings ~~~ , ............................................................................. •. ( -- . - Collection + 100 -100 ::::= account Cash Accounts = . = . able Receivable ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- +100 +100 +100 +100 Revenue Adjustments are an important part of the accounting process and are crucial to accurate and ative financial accounting. It is through the accruals process that managers communicate ation about future cash flows. For example, from accrual information, we know that Apple - for a resource (inventories) that it has not yet sold. We know that suppliers have money owed m (accounts payable) but Apple won't pay them until a future period. We know that revenues been earned but cash not yet received (accounts receivable). Those accruals tell us about e's past performance and, perhaps more importantly, about Apple's future cash flows. When correctly, accruals convey a wealth of information about the past and the future that is useful in evaluation of company financial performance and condition. Thus, we can use accrual informa- to more precisely value companies' equity and debt securities. _ ot all managers are honest; some misuse accounting accruals to improperly recognize reve- and expenses. Abuses include accruing revenue before it is earned; and accruing expenses in wrong period or in the wrong amount. These actions are fraudulent as they deliberately over- or understate revenues and expenses and, thus, reported net income is incorrect. Safeguards -' t this type of managerial behavior include corporate governance systems (internal controls, ting policies and procedures, routine scrutiny of accounting reports, and audit committees) external checks and balances (independent auditors, regulatory bodies, and the court system).
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