– Rent is paid even if no sales are made.
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Matching and Cost Recovery
Matching
- recording of expenses in the same time period as the related revenues are recognized recovery - concept by which some purchases of goods or services are recorded as assets and “expired” later because the costs are expected to be recovered in future periods
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Recognition of Revenues
Recognition
- a test to determine whether revenues should be recorded in the financial statements for a given period
To
• Accrual basis - recognizes the impact of transactions for the time periods when revenues and expenses occur even if no cash changes hands • Cash basis - recognizes the impact of transactions only when cash is received or disbursed
• Expenses are recorded when incurred.
– For example, a purchase on account is recorded as an expense when the transaction takes place even though the buyer disburses no cash at that moment.
– Without sales there is no cost of goods sold or sales commissions.
Period
costs - those linked with the time period
itself
• Rent or other administrative expenses
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Accrual Basis and Cash Basis
Under
the accrual basis:
• Revenues are recorded when earned.
– For example, a sale on account is recorded as revenue when the transaction takes place even though the seller receives no cash at that moment.
2-5
Operating Cycle
Operating
cycle - the time span during which cash is used to acquire goods and services, which in turn are sold to customers, who in turn pay for their purchases, with cash
• The most popular period for measuring income is the calendar year, but many companies use a fiscal year, which is a year that ends on a date other than December 31, usually at the low point in annual business activity. • Companies also prepare statements for interim periods, generally on a quarterly or monthly basis.
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Recognition of Revenues
For
most retailers, revenue recognition is straightforward – revenue is earned and realized at the point of sale, which is when the customer pays and takes possession of the goods.
Expenses
2-8
Revenues and Expenses
Income
(profit) - the excess of revenues over expenses
• Revenues - Expenses = Profit
Retained
income - additional owners’ equity generated by income or profits
2-1
Chapter 2
Measuring Income to Assess Performance
2-2Learning 源自bjectivesAfter studying this chapter, you should be able to:
Explain
how accountants measure income. Use the concepts of recognition, matching, and cost recovery to record revenues and expenses. Prepare an income statement and show how it is related to a balance sheet. Calculate operating cash flows and show how cash flow differs from income.
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Matching and Cost Recovery
Two types of expenses:
Product
costs - those linked with revenue earned in the same period
• Cost of goods sold or sales commissions
2-7
Revenues and Expenses
Revenues
(sales) - gross increases in owners’ equity arising from increases in assets received in exchange for the delivery of goods or services to customers - decreases in owners’ equity that arise because goods or services are delivered to customers
2 - 12
Accrual Basis and Cash Basis
The
accrual basis is the current standard for the measurement of income.
• Presents a more complete summary of what happened during the year • Recognizes revenues when they are earned and expenses when they are incurred • Matches costs to revenues
• Revenues increase owners’ equity. • Expenses decrease owners’ equity.
2-9
Accrual Basis and Cash Basis
The
most common ways of measuring income are the accrual basis and the cash basis.
2 - 15
Recognition of Revenues
For
other companies, revenue may be earned and realized at different times.
• Magazine subscriptions are received in advance, but the revenue is not earned until the issues are delivered. • Supplies are sent to customers throughout the month, but the cash is not received until the customer formally promises to accept the supplies and pay for them.
2 - 11
Accrual Basis and Cash Basis
Under
the cash basis:
• Revenues are recorded when a sale is made for cash at the time when the cash changes hands. • Expenses are recorded when a purchase is made for cash at the time when the cash changes hands.