Balance Sheet Income Statement Transaction Cash Asset + Noncash Asset = Liabilities + Contrib. Capital + Earned Capital Revenues – Expenses = Net Income Purchase inventory on account for $2,000 +2,000 Inventory = +2,000 Accounts Payable – = Both assets (inventory) and liabilities (accounts payable) increase and the accounting equation is in balance.
Jana Juice’s Balance Sheet ©2020 Cambridge Business Publishers No income statement transactions have occurred so there is no income statement. Assets Liabilities Cash $12,200 Accounts payable $ 2,000 Inventory 2,000 Note payable 4,000 Security deposit 1,800 Total current liabilities 6,000 Total current assets 16,000 Equity Common stock 10,000 Total assets $16,000 Total liabilities & equity $16,000 Assets = Liabilities + Equity
Learning Objective Describe and construct the income statement and discuss how it can be used to evaluate management performance. ©2020 Cambridge Business Publishers 3
Reporting Financial Performance ©2020 Cambridge Business Publishers Income Statement Reports the results of operations as net income or loss for a period of time General income statement format Revenues – Cost of goods sold Gross profit – Expenses = Net income (earnings) Revenues are increases in net assets that result from business activities. Revenues are increases in net assets that result from business activities. Expenses are the outflow or use of assets to generate revenues. Expenses are the revenues.
Target’s Income Statement ©2020 Cambridge Business Publishers Target reported $22,057 million gross profit on its income statement for the year ended February 2, 2019. Target Corporation Income Statement ($ million) For Year Ended February 2, 2019 Net revenues $75,356 Cost of sales 53,299 Gross profit 22,057 Operating expenses 17,687 Income from continuing operations before income taxes 3,676 Income tax expense 746 Net income from continuing operations $ 2,930 Discontinued operations, net of tax 7 Net (loss)/income 2,937 Operating expenses are usual and customary costs incurred to support the main business activities.
Operating Revenues and Expenses ©2020 Cambridge Business Publishers Revenues Result from increases in net assets Caused by the company’s operating activities Expenses Result from decreases in net assets Caused by the company’s revenue-generating activities Cost of products and services sold Operating costs Nonoperating costs Revenues – Expenses = Net income (Net loss)
Nonoperating Revenues and Expenses ©2020 Cambridge Business Publishers Relate to the company’s financing and investing activities Interest revenue Interest expense Usually segregated as they offer different insights into company performance Recurring items—persist in the future Nonrecurring items—unlikely to arise in the future; not relevant to future performance
Learning Objective Explain revenue recognition, accrual accounting, and their effects on retained earnings.
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