Accountancy 200 Fundamentals of Accounting

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Accountancy 200Fundamentals of Accounting

• OPERATING DECISIONS AND THE INCOME STATEMENT
  Part I

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Business Operating Cycle Revised
Acquisition of productive resources and payment
to resource providers
Transformation of productive resources into goods
and services
Acquisition of capital and cash receipts from
customers
Sale of goods and services to customers
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Income Statement
As we saw earlier, the income statement is a
statement of a business earnings over a period
of time.
The income statement is represented by the
equation
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Revenues
Inflows or other enhancements of an entitys
assets and/or settlements of its liabilities
during a period from activities that constitute
the entitys ongoing major or central operations.
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Expenses
Outflows or other using up of an entitys assets
and/or incurring liabilities during a period from
activities that constitute the entitys ongoing
major or central operations.
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Gains and Losses
Increases and decreases in an entitys net assets
from transactions peripheral or incidental to its
ongoing major or central operations.
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GAAP Underlying Income Statement
Generally accepted accounting principles require
the use of accrual accounting for financial
reporting purposes.

• Cash accounting
• Accrual accounting

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GAAP Underlying Income Statement
Revenue recognition principle Revenue is
recognized when (all the following criteria must
be satisfied)
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E3-2 Identifying Revenue Accounts
In February, a customer orders and receives 10
personal computers from Gateway 2000 the
customer promises to pay 25,000 within three
months. Answer from Gateways perspective.
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E3-2 Identifying Revenue Accounts
In March, Sam Shell Dodge sells a delivery truck
with a list, or sticker, price of 24,000 for
21,000 cash.
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E3-2 Identifying Revenue Accounts
In April, Hudsons Department Store orders 1,000
mens shirts from Arrow Shirt Company for 18
each for future delivery. The terms require
payment in full within 30 days of delivery.
Answer from Arrows standpoint.
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E3-2 Identifying Revenue Accounts
In May, Arrow Shirt Company completes production
of the shirts ordered by Hudson Department Store.
Answer from Arrows standpoint.
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E3-2 Identifying Revenue Accounts
In May, Arrow Shirt Company delivers the
described order to Hudson Department Stores.
Answer from Arrows standpoint.
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E3-2 Identifying Revenue Accounts
In June, Arrow Shirt Company receives payment
from Hudson for the described shirt order.
Answer from Arrows standpoint.
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E3-2 Identifying Revenue Accounts
In December, a customer purchases a ticket from
American Airlines for 500 cash to travel the
following January. Answer from American
Airlines standpoint.
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E3-2 Identifying Revenue Accounts
In October, General Motors issues 26 million in
new common stock.
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E3-2 Identifying Revenue Accounts
In May, Penn State University receives 20
million cash for 80,000 five-game season football
tickets.
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E3-2 Identifying Revenue Accounts
In May, Penn State plays its first football game.
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E3-2 Identifying Revenue Accounts
In November, Turner Construction Company signs a
contract with a customer for the construction of
a new 500,000 warehouse. At the signing, Turner
receives a check for 50,000 as a deposit on the
future construction.
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GAAP Underlying Income Statement
Expense recognition (matching) principle
Economic resources consumed in earning revenues
are recognized at the same time the entity
recognizes associated revenues.

• Period expenses
• Product expenses

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GAAP Underlying Income Statement
Expense recognition (matching) when resources
have a relation with production of the entitys
goods and services.

• Direct matching
• Indirect matching

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E3-4 Identifying Expense Accounts
On February 8, Gateway 2000 pays its computer
service tech-nicians 90,000 salary for the two
weeks ended February 7. Answer from Gateways
standpoint.
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E3-4 Identifying Expense Accounts
On January 2, Turner Construction Company pays
4,500 in workers compensation insurance for the
first three months of the year. The February
effects are
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E3-4 Identifying Expense Accounts
During February, McGraw-Hill Publishing Co. uses
1,000 worth of electricity and natural gas in
its headquarters building for which it has not
yet been billed.
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E3-4 Identifying Expense Accounts
On February 9, Arrow Shirt Co. completes
production of 1,000 mens shirts ordered by
Hudson Department Store at a cost of 9 each.
Answer from Arrows standpoint.
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E3-4 Identifying Expense Accounts
On February 14, Arrow Shirt Co. delivers the
ordered shirts to Hudson.
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E3-4 Identifying Expense Accounts
On February 28, Arrow Shirt Co. receives payment
in cash from Hudson for the shirt order.
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E3-4 Identifying Expense Accounts
On February 2, Sam Shell Dodge pays its
salespersons 3,500 in commissions related to
January automobile sales.
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E3-4 Identifying Expense Accounts
On February 28, Sam Shell Dodge determines it
will pay its salespersons 4,200 in commissions
related to February sales. The payment will be
on March 3.
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E3-4 Identifying Expense Accounts
On February 28, a new grill is installed at a
McDonalds restaurant. On the same day, payment
of 12,000 is made in cash.
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E3-4 Identifying Expense Accounts
On February 15, the University of Florida orders
60,000 season football tickets from its printer
and pays 6,000 in advance for the custom
printing. The first game will be played in
September.
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E3-4 Identifying Expense Accounts
On February 1, Pyramid Mall had janitorial
supplies costing 1,000 in storage. An
additional 600 worth of supplies was purchased
during February. At the end of February, 900
worth of janitorial supplies remain in storage.