Chapter two-two

1、1 - 1 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottChapter 2 Measuring Income toAssess Performance1 - 2 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott Review

2、 part one Expanded Accounting Equation Introduction to income measurement 1 - 3 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottExpanded Accounting Equationu Expansion of the balance sheet equation:Assets = Liabilities + Owners Equ

3、ityAssets = Liabilities + Paid-in Capital + Retained IncomeAssets = Liabilities + Paid-in Capital + Revenues - Expenses1 - 4 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottRevenues and ExpensesuIncome (profit) - the excess of reve

4、nues over expenses Revenues - Expenses = ProfituRetained income - additional owners equity generated by income or profits Revenues increase owners equity. Expenses decrease owners equity.1 - 5 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, a

5、nd Elliott “Revenues - increases in owners equity arising from increases in assets received in exchange for the delivery of good or services to customers.Revenues1 - 6 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott “Expenses - de

6、creased in owners equity that arise because goods or services are delivered to customersExpenses1 - 7 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottThe Bottom LineIf Revenues Exceed Expenses in the current period, its called “Net

7、 Income”If Expenses Exceed Revenues in the current period, its called “Net Loss”1 - 8 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottOperating CycleuOperating cycle - the time span during which cash is used to acquire goods and se

8、rvices, which in turn are sold to customers, who in turn pay for their purchases, with cashCash$100,000MerchandiseInventory$100,000AccountsReceivable$160,000BuySellCollect1 - 9 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottThe Ac

9、counting Time PerioduCompanies need a way to measure performance over discrete time periods. 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 busines

10、s activity. Companies also prepare statements for interim periods, generally on a quarterly or monthly basis.1 - 10 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottPart two Accrual Basis and Cash Basis Recognition of Revenues Match

11、ing and Cost Recovery1 - 11 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott Recognition: formally recording an item in the financial statements of an entityAccrual Basis and Cash BasisI know I need to record this. Measurement: qua

12、ntification of the economic effects of the item on the entity.but at current value or historical cost? LO11 - 12 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis and Cash BasisuThe most common ways of measuring income

13、are the accrual basis and the cash basis. Accrual basis Cash basis1 - 13 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott “Accrual basis -recognizes the impact of transactions for the time periods when revenues and expenses occur e

14、ven if no cash changes hands.”Accrual basis1 - 14 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott “Cash basis - recognizes the impact of transactions only when cash is received or disbursed.”Cash Basis1 - 15 2002 Prentice Hall Bus

15、iness Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis and Cash BasisuUnder 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 receiv

16、es no cash at that moment. 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.1 - 16 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th

17、 EditionHorngren, Sundem, and ElliottAccrual Basis and Cash BasisuUnder 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.1 - 17 2002 Prentice Hall

18、 Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis decouples measured earnings from the amount of cash generated from operations. a. Accrual basis Revenues generally do not correspond to cash receipts for the period, nor do reported Expen

19、ses always correspond to cash outlays of the period.Accrual Basis1 - 18 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliottb. Accrual basis can produce large discrepancies between measured earnings and the amount of cash generated fro

20、m operations. Accrual Basis1 - 19 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliottc.Accrual basis earnings provide a more accurate measure of the economic value added during the period than do operating cash flows.Accrual Basis1 -

21、20 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottCash basis determination may distort ones view of operating performance.a. Cash-basis income fails to properly match effort & accomplishmentCash Basis1 - 21 2002 Prentice Hall

22、Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottCash Basisb .Cash-basis income may not provide a reliable benchmark for predicting future operating results.1 - 22 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th Editio

23、nHorngren, Sundem, and Elliotta. Canterbury sells three-year subscriptions of a quarterly publication to subscribers, who prepay the full subscription price. $300,000 b. Canterbury takes out a three-year loan at the beginning of the three-year subscription period, but interest is payable at maturity

24、 of the loan. ($30,000)c. Costs to publish and distribute the magazine are paid in cash at the time of publication. ($60,000)Lets look at an example:Canterbury Publishing : 1.There are several “facts” to consider.1 - 23 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th

25、 EditionHorngren, Sundem, and ElliottCash Basis Income DeterminationCash InflowsCash outflows for Prod. & Distr.Cash Outflow for interest on loanNet Income (loss) Cash Basis200120022003What happens in Year 1?$300,000(60,000)0$240,0001 - 24 2002 Prentice Hall Business Publishing Introduction to F

26、inancial Accounting, 8th EditionHorngren, Sundem, and ElliottCash Basis Income DeterminationCash InflowsCash outflows for Prod. & Distr.Cash Outflow for interest on loanNet Income (loss) Cash Basis200120022003What happens in Year 2?$300,000(60,000)0$240,000$ 0(60,000)0($60,000)1 - 25 2002 Prenti

27、ce Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottCash InflowsCash outflows for Prod. & Distr.Cash Outflow for interest on loanNet Income (loss) Cash Basis200120022003What happens in Year 3?$300,000(60,000)0$240,000$0(60,000)0($60,000)$ 0(6

28、0,000)(30,000)($90,000)Cash Basis Income Determination1 - 26 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis Income DeterminationNowletstakealookatIncomeMeasurementusingAccrualBasisaccounting!1 - 27 2002 Prentice Hall

29、 Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis Income DeterminationAccrual RevenuesAccrual Expensesfor Prod. & Distr.Accrual Interest Expensefor the loanNet Income (loss) Accrual Basis200120022003What happens in Year 1?$100,000(60

30、,000)(10,000)$30,000$300,000/3 = $100,000 per year$30,000/3 = $10,000 per year1 - 28 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis Income Determination200120022003What happens in Year 2?(60,000)$30,000Accrual Revenu

31、esAccrual Expensesfor Prod. & Distr.Accrual Interest Expensefor the loanNet Income (loss) Accrual Basis$100,000(60,000)$30,000$100,000$300,000/3 = $100,000 per year$100,000 of Revenue is still deferred(10,000)(10,000)1 - 29 2002 Prentice Hall Business Publishing Introduction to Financial Account

32、ing, 8th EditionHorngren, Sundem, and ElliottAccrual Basis Income Determination200120022003What happens in Year 3?(60,000)(10,000)$30,000(60,000)$30,000Accrual RevenuesAccrual Expensesfor Prod. & Distr.Accrual Interest Expensefor the loanNet Income (loss) Accrual Basis$100,000(60,000)$30,000$100

33、,000$100,000(10,000)(10,000)1 - 30 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott Cash basisstatementAccrual basis statementStatement ofCash Flows Cash flows from operating activities IncomeStatement Net income1 - 31 2002 Prentic

34、e Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottAccrual Basis and Cash BasisuThe 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 th

35、ey are earned and expenses when they are incurred Matches costs to revenues1 - 32 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottRecognition of RevenuesuRecognition - a test to determine whether revenues should be recorded in the

36、financial statements for a given perioduTo be recognized, revenue must be: Earned - goods are delivered or a service is performed Realized - cash or a claim to cash (credit) is received in exchange for goods or services1 - 33 2002 Prentice Hall Business Publishing Introduction to Financial Accountin

37、g, 8th EditionHorngren, Sundem, and ElliottRecognition of RevenuesuFor 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.1 - 34 2002 Prentice Hall Business Publishing Introduct

38、ion to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottRecognition of RevenuesuFor 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

39、customers throughout the month, but the cash is not received until the customer formally promises to accept the supplies and pay for them.1 - 35 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottRecognition of Revenues1 - 36 2002 Pre

40、ntice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottData: Contract price: $4,500,000 Estimated cost: $4,000,000Start date: July, 2003 Finish: October, 2005Balance sheet date: December, 31Given: 2003 2004 2005Costs to date$1,000,000 $2,916,000

41、$4,000,000What is the percent complete, revenue recognized each year?Recognition of Revenues1 - 37 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and Elliott 2003 2004 2005 % complete to-date1,000,000 = 25% 2,916,000= 72% 100 %4,000,000 4,00

42、0,000Revenue recognized4,500,000 * 25% 4,500,000 * 72% 4,500,000= 1,125,000 less 1,125,000 less 3,240,000 = 2,115,000 = 1,260,0001,125,000 less 2,115,000 less 1,260,0001,000,000 1,916,000 less 1,134,000= 125,000 = 199,000 = 126,000Gross Profit recognized Recognition of Revenues1 - 38 2002 Prentice H

43、all Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottMatching and Cost RecoveryTwo types of expenses:uProduct costs - those linked with revenue earned in the same period Cost of goods sold or sales commissions Without sales there is no cost of goods s

44、old or sales commissions.uPeriod costs - those linked with the time period itself Rent or other administrative expenses Rent is paid even if no sales are made.1 - 39 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottMatching and Cost

45、 RecoveryuMatching - recording of expenses in the same time period as the related revenues are recognizeduCost 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 An example is ren

46、t for one year paid in advance.1 - 40 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottMatching and Cost RecoveryDirectly Indirectlyover period theyprovide benefitsSimultaneouslyupon theiracquisitione.g. Inventorye.g. Buildingse.g.

47、UtilitiesMatch expenses with associated revenues1 - 41 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottMatching and Cost RecoveryuAnother example of matching and cost recovery is depreciation. Depreciation - the systematic allocati

48、on of the acquisition cost of long-lived assets or fixed assets to the expense accounts of particular periods that benefit from the use of the assets Assets wear out or are used up over a period of time, so more and more of their original costs are transferred from asset accounts to expense accounts.1 - 42 2002 Prentice Hall Business Publishing Introduction to Financial Accounting, 8th EditionHorngren, Sundem, and ElliottMatching and Cost RecoveryIncome StatementPP&EIntangiblesas usedBalance Sheetwhen soldover period they pro