WUSTL ACCT 2610 - Class 5 - Chapter 3-for student-1 (44 pages)

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Class 5 - Chapter 3-for student-1



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Class 5 - Chapter 3-for student-1

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Pages:
44
School:
Washington University in St. Louis
Course:
Acct 2610 - Principles of Financial Accounting
Principles of Financial Accounting Documents

Unformatted text preview:

Class 5 Chapter 3 The Income Statement Accounting 2610 Xiumin Martin 9 19 2011 1 Plan Business operating objective is to make profits Income Measurement How do we measure these profits Operating cycle Income statement elements Principles Accrual versus Cash Basis Accounting Debit Credit Framework Example 2 Income Measurement The Operating Cycle 1 Purchase merchandise from supplier 2 Pay supplier for merchandise 3 Sell merchandise to customer 4 Collect cash from customer time The cash to cash cycle of a business Length depends on nature of business 3 Income Statement Accounting cycle Income statement provides a measure of company s performance on a periodic basis Relies on time period assumption that the life of a company can be divided into shorter intervals 4 Income Statement Elements Revenues result from selling goods or services as part of company s normal ongoing operations There are revenues not from operating activities Gains are a result of peripheral transactions E g Selling of land Investment income 5 Income Statement Elements Expenses are the use of assets to generate revenues different from expenditures There are expenses not from operating activities Losses are a result of peripheral transactions Interest expense 6 Income Measurement Two critical questions when reporting on a periodic basis 1 2 When should revenue and expenses be recognized Recognition What amount should be recorded by the company Measurement 7 Principles Affecting Income Determination Recognition Revenue Principle Record revenues when earned and measurable Matching Principle Record expenses when incurred in earning revenue Measurement Historical Cost Principle Cash equivalent cost given up is the basis for initial recording of financial statement items 8 The Revenue Recognition Principle Recognize Revenue when 1 2 3 4 Delivery has occurred or services have been rendered There is evidence of an arrangement for customer payment The price is fixed or determinable Collection is reasonably



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