BlocherChenLin

1
Basic Accounting Concepts The Income Statement
3
Part One Financial Accounting

• The McGraw-Hill Companies, Inc., 1999

2
Basic Business Financial Flows
Slide 3-1
Cash
Collection activities
Purchasing or production activities
Accounts receivable
Inventories
Earnings activities
3
Basic Concepts
Slide 3-2
4
Basic Concepts
Slide 3-3
Lets take a look at our summer camps income
statement for a few summer months.

• Revenues 122,400
• Less expenses
• Food 42,756
• Wages 46,935
• Rental 12,000
• Other costs 5,472
• Total exp. 107,163
• Net income 15,237

Accounting Period Concept
5
Basic Concepts
Slide 3-4
The accounting period concept allows us to
find out how we did for a specific period of time.
Revenues 122,400 Less expenses Food 42,756
Wages 46,935 Rental 12,000 Other costs
5,472 Total exp. 107,163 Net income
15,237
Accounting Period Concept
6
Basic Concepts
Slide 3-5
7
Basic Concepts
Slide 3-6
Aspects of the conservatism concept

• Recognize revenues (increases in retained
  earnings) only when they are reasonably certain.
• Recognize expenses (decreases in retained
  earnings) as soon as they are reasonably possible.

8
Basic Concepts
Slide 3-7
In December, customers pay for a years
subscription to a magazine that they will begin
receiving in January.

• When should the revenue be recognized?

Conservatism Concept
9
Basic Concepts
Slide 3-8
In December, customers pay for a years
subscription to a magazine that they will begin
receiving in January.
Revenue is recognized when the service is
performed--thus in the year the magazine service
is provided.
Conservatism Concept
10
Basic Concepts
Slide 3-9
11
Basic Concepts
Slide 3-10
Joe makes credit sales of merchandise amounting
to 100,000.
Realization Concept
12
Basic Concepts
Slide 3-11
If experience indicates that 3 percent of credit
sales will eventually become bad debts, then
revenue for the period is 97,000.
Sorry Joe, I cant pay.
Realization Concept
13
Basic Concepts
Slide 3-12
14
Basic Concepts
Slide 3-13
Today is March
On March 19, an item of inventory costing 1,000
is received.
19
Matching Concept
15
Basic Concepts
Slide 3-14
Today is April
On April 16, the vendor is paid in full.
16
Matching Concept
16
Basic Concepts
Slide 3-15
Today is May
On May 9, the item of merchandise is sold for
1,500.
9

• When should the merchandise be an expense to the
  firm?

Matching Concept
17
Basic Concepts
Slide 3-16
Today is May
On May 9, the item of merchandise is sold for
1,500.
9
In May, when the merchandise is sold.
Matching Concept
18
Basic Concepts
Slide 3-17
Types of transactions that need to be considered
in distinguishing between amounts that are
properly considered as expenses of a given
accounting period and the expenditures made in
connection with the item.

• Expenditures that are also expenses
• Beginning assets that become expenses
• Expenditures that are not yet expenses
• Expenses not yet paid

19
Basic Concepts
Slide 3-18
20
Basic Concepts
Slide 3-19
LIFO
The consistency concept Once an entity has
decided on one accounting method, it should use
the same method for all subsequent events of the
same character (unless it has a sound reason to
change methods).
21
Basic Concepts
Slide 3-20
22
Basic Concepts
Slide 3-21
A dozen pencils were purchased for the office
secretary. These pencils are assets to the firm
and technically should be expensed each time one
is used. Materiality allows the firm to expense
the pencil either at the time of purchase or when
an inventory is taken of office supplies at
period-end.
Materiality
23
Income Statement
Slide 3-22
GARDEN CORPORATION Income Statement For the Year
Ended December 31, 1998
Net sales 75,478,221 Cost of sales 52,227,004 Gro
ss margin 23,251,217 Research and development
expense 2,158,677 Selling, genera, and
administrative expenses 8,726,696 Operating
income 12,356,844 Other revenues
(expenses) Interest expense (363,000 Interest
and dividend revenues 43,533 Royalty revenues
420,010 Income before income
taxes 12,466,387 Provision for income taxes
4,986,555 Net income 7,479,832
)
24
Statement of Retained Earnings
Slide 3-23
Statement of Retained Earnings
Retained earnings at the beginning of
year 16,027,144 Add Net income 7,479,832 Deduct
Dividends (4 per common share) (4,390,000 Reta
ined earnings at end of year 19,116,976
25
Chapter 3
The End