o Noodlecake reports Service Revenue on the income statement and Accounts

O noodlecake reports service revenue on the income

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o Noodlecake reports Service Revenue on the income statement and Accounts Receivable on the balance sheet. o Later, when payment is received, Noodlecake increases its Cash account and decreases its Accounts Receivable account. No additional revenue is reported when the payment is received b/c the revenue was already recorded as the consulting services were provided. Evaluate the Results - Net Profit Margin o The income statement provides the main measure of a company’s operating performance. o Key thing to look for is whether net income is positive (revenues exceed expenses). o It’s useful to consider whether revenues are growing faster than expenses. If so, the company’s net income will be increasing. o Net profit margin: profit earned from each dollar of revenue. Formula: net income / revenues What it tells you: How much profit from each dollar of revenue A higher ratio means better performance - Income Statement Limitations
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o Some people think net income equals the amount of cash generated by the business during the period. It’s not the way companies recognize revenues and expenses on the income statement when using accrual basis accounting. Net income is not cash. o A company’s net income represents the change in the company’s value during the period. (false) Many other determinants of its value are not included in the income statement. o The measurement of income involves only counting. (false) Proper counting is critical to income measurement, but estimation also plays a role. Review the Chapter - 3.1 Describe common operating transactions and select appropriate income statement account titles. o The income statement reports the results of transactions that affect net income, including: Revenues—amounts charged to customers for sales of goods or services provided. Expenses—costs of business activities undertaken to generate revenues. o Who: Name of the business o What: Title of the statement o When: Accounting period - 3.2 Explain and apply the revenue and expense recognition principles. o The two key concepts underlying accrual basis accounting and the income statement are: Revenue recognition principle—recognize revenues when the seller fulfills its performance obligation to customers by delivering goods or services, regardless of when cash is received. Expense recognition principle (“matching”)—recognizes expenses when they are incurred in generating revenue, regardless of when cash is paid. o A five-step model guides revenue reporting: 1. Identify the contract 2. Identify the seller’s performance obligation(s) 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when (or as) each performance obligation is satisfied.
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