operating decisions and the income statement chapter 3 mcgraw-hill/irwin © 2009 the mcgraw-hill...
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Operating Decisions andthe Income Statement
Chapter 3
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
Group Project 1
• Use EDGAR: www.sec.gov• Read Articles (e-reserves) – link at ACCT 20100
website• Answer questions.
The Operating CyclePurchase or manufacture products or
supplies on credit.
Purchase or manufacture products or
supplies on credit.
Deliver product or provide service to
customers on credit.
Deliver product or provide service to
customers on credit.
Pay suppliers.
Pay suppliers.
Receive payment from customers.
Receive payment from customers.
Begin
Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs,
not necessarily when cash is paid or received.
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 - GenerallyAcceptableAccountingPrinciples
Required by - GenerallyAcceptableAccountingPrinciples
Accrual Accounting
Revenue PrincipleRecognize revenues when . . .
Delivery has occurred or services have been rendered.
There is persuasive evidence of an arrangement for customer payment.
The price is fixed or determinable.Collection is reasonably assured.
Recognize revenues when . . .Delivery has occurred or services have
been rendered.There is persuasive evidence of an
arrangement for customer payment. The price is fixed or determinable.Collection is reasonably assured.
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 -
CashReceived
Cash (+A) xxx Unearned revenue (+L) xxx
Revenue Principle
When the company delivers the goods or services UNEARNED REVENUE is reduced
and REVENUE is recorded.
Cash received before revenue is earned -
CashReceived
Company Delivers
Cash (+A) xxx Unearned revenue (+L) xxx
Revenue will be recorded when earned.
Revenue Principle
CASH COLLECTED (Goods or services due to
customers)over time will
become
REVENUE (Earned when goods or services provided)
Rent collected in advance Rent revenue
Unearned air traffic revenue Air traffic revenue
Deferred subscription revenue Subscription revenue
Typical liabilities that becomerevenue when earned include . . .
Revenue Principle
When cash is received on the date the revenue is earned, the following entry is made:
CashReceived
Company Delivers
Cash (+A) xxx Revenue (+R) xxx
AND
Revenue Principle
If cash is received after the company delivers goods or services, an asset ACCOUNTS RECEIVABLE is recorded.
Cash received after revenue is earned -
Accounts receivable (+A) xxx Revenue (+R) xxx
Company Delivers
Revenue Principle
CashReceived
Accounts receivable (+A) xxx Revenue (+R) xxx
Cash received after revenue is earned -
Company Delivers
When the cash is received the ACCOUNTS RECEIVABLE is reduced.
Cash will be collected.
Revenue Principle
CASH TO BE COLLECTED
(Owed by customers)
and already earned as
REVENUE (Earned when
goods or services provided)
Interest receivable Interest revenue
Rent receivable Rent revenue
Royalties receivable Royalty revenue
Assets reflecting revenues earned butnot yet received in cash include . . .
The Matching Principle
Resources consumed to earn
revenues in an accounting period should be recorded
in that period, regardless of when
cash is paid.
Resources consumed to earn
revenues in an accounting period should be recorded
in that period, regardless of when
cash is paid.
The Matching Principle
If cash is paid before the company receives goods or services, an asset account,
PREPAID EXPENSE is recorded.
Cash is paid before expense is incurred -
$Paid
Prepaid expense (+A) xxx Cash (-A) xxx
The Matching Principle
ExpenseIncurred
When the expense is incurred PREPAID EXPENSE is reduced and an EXPENSE is
recorded.
Cash is paid before expense is incurred -
$Paid
Prepaid expense (+A) xxx Cash (-A) xxx
Expense will be recorded when incurred.
The Matching Principle
When cash is paid on the date the expense is incurred, the following
entry is made:
CashPaid
ExpenseIncurred
Expense (+E) xxx Cash (-A) xxx
AND
The Matching Principle
If cash is paid after the company receives goods or services, a liability PAYABLE is
recorded.
Cash paid after expense is incurred -
Expense (+E) xxx Payable (+L) xxx
ExpenseIncurred
The Matching Principle
CashPaid
When cash is paid the PAYABLE is reduced.
Cash paid after expense is incurred -
ExpenseIncurred
Expense (+E) xxx Payable (+L) xxx
Cash will be paid.
The Matching Principle
CASH PAID FORas used over
time becomes EXPENSE
Supplies inventory Supplies expense
Prepaid insurance Insurance expense
Buildings and equipment Depreciation expense
Typical assets and their relatedexpense accounts include. . .
A = L + SEA = L + SEASSETS
Debit for Increase
Credit for Decrease
LIABILITIES
Debit for
Decrease
Credit for Increase
RETAINED EARNINGS
Debit for
Decrease
Credit for Increase
CONTRIBUTED CAPITAL
Debit for
Decrease
Credit for Increase
Next, let’s see how Revenues and
Expenses affect Retained Earnings.
EXPENSES
Debit for
Increase
Credit for Decrease
REVENUES
Debit for
Decrease
Credit for Increase
RETAINED EARNINGS
Debit for
Decrease
Credit for Increase
Expanded Transaction Analysis Model
Dividends decrease Retained Earnings.
Net Income increases Retained Earnings.
3- 22
Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months.
Identify & Classify the Accounts1. Cash (asset).2. Franchise fee revenue (revenue).3. Unearned franchise fees (liability).
Determine the Direction of the Effect1. Cash increases.2. Franchise fee revenue increases.3. Unearned franchise fees increases.
= +Cash 400 Unearned franchise
revenue300 Franchise fees
revenue100
Stockholders' EquityLiabilitiesAssets
Debit CreditCash (+A) 400
Unearned franchise revenue (+L) 300 Franchise fees revenue (+R, +SE) 100
Description
General Journal
Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months.
The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600.
Identify & Classify the Accounts1. Cash (asset).2. Restaurant sales revenue (revenue).3. Cost of sales- restaurant (expense).4. Inventories (asset).
Determine the Direction of the Effect1. Cash increases.2. Restaurant sales revenue increases.3. Cost of sales- restaurant increases. 4. Inventories decrease.
Debit CreditCash (+A) 36,000
Restaurant sales revenue (+R, +SE) 36,000
Cost of sales - restaurant (+E, -SE) 9,600 Inventories (-A) 9,600
Description
General Journal
= +Cash 36,000 Restaurant sales
revenue36,000
Inventory (9,600) Cost of sales (9,600)
Stockholders' EquityLiabilitiesAssets
The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600.
Let’s look at E3-3
• A customer orders and receives 10 personal computers from Dell; the customer promises to pay $18,400 within three months. Answer from Dell’s standpoint. What about cost info?
Account Name Debit Credit
Accounts Receivable $18,400
Sales Revenue $18,400
• Fucillo Hyundai, Inc, sells a truck with a list, or sticker, price of $20,050 for $18,050 cash.
Account Name Debit Credit
Cash $18,050
Sales Revenue $18,050
• Bon-Ton Department Store orders 1,000 men’s shirts from Arrow Shirt Company for $15 each for future delivery. The terms require full payment within 30 days of delivery. Answer from Arrow’s standpoint.
Account Name Debit Credit
No Entry
• Arrow Shirt Company completes production of the shirts described in part c and delivers the order (answer from Arrow Shirt Company perspective)
Account Name Debit Credit
Accounts Receivable $15,000
Sales Revenue $15,000
• Arrow receives payment from Bon-Ton for the order described in part c. Answer from the perspective of Arrow Shirt Company.
Account Name Debit Credit
Cash $15,000
Accounts Receivable $15,000
• A customer purchases a ticket from American Airlines for $410 cash to travel the following January. Answer from American Airlines perspective.
Account Name Debit Credit
Cash $410
Unearned Airfare Revenue $410
• General Motors issues $20 million in new common stock
Account Name Debit Credit
Cash $20,000,000
Contributed Capital $20,000,000
• Pen State University receives $18,300,000 cash for 80,000 five-game season football tickets.
Account Name Debit Credit
Cash $18,300,000
Unearned Football Ticket Revenue $18,300,000
• Penn State plays the first football game described in part h.
Account Name Debit Credit
Unearned Football Ticket Revenue $3,660,000
Football Ticket Revenue $3.660,000
• Precision Construction Company signs a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Precision receives a $50,000 deposit as a deposit on the future construction project. Answer from the perspective of Precision.Account Name Debit Credit
Cash $50,000
Unearned Construction Revenue $50,000
• On September 1, 2012, a bank lends $1,200 to a company; the note principal and $144 annual interest are due in one year (1,200 X 12%). Answer from the Bank’s perspective.
• NOW:
• In 1 year (assuming no other transactions are recorded?
Account Name Debit Credit
Note Receivable $1,200
Cash $1,200
• A popular ski magazine company receives a total of $1,980 today from subscribers. The subscriptions begin in the next fiscal year. Answer from the perspective of the magazine company:
• What do you do with each edition of the magazine that is sent out?
Account Name Debit Credit
Cash $1,980
Unearned Subscription Revenue $1,980
• Sears, a retail store, sells a $100 lamp to a customer who charges the sale on his store credit card. Answer from Sear’s perspective.
Account Name Debit Credit
Accounts Receivable $100
Sales Revenue $100
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