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Transcript of Robert N. West © VEMBA Accounting Basic Accounting Concepts: The Income Statement © The...
Robert N. West © VEMBA Accounting
Basic Accounting Concepts: The Income Statement
© The McGraw-Hill Companies, Inc., 1999
3Part One: Financial Accounting
Robert N. West © VEMBA Accounting
Basic Business Financial Flows
CashCash
Accounts Accounts receivablereceivable
InventoriesInventories
Collection activities
Purchasing or production activities
Earnings activities
Slide 3-1
Robert N. West © VEMBA Accounting
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Basic Concepts Slide 3-2
Robert N. West © VEMBA Accounting
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
Basic Concepts
Let’s take a look atour summer camps
income statement for afew summer months.
Let’s take a look atour summer camps
income statement for afew summer months.
Accounting Period ConceptAccounting Period Concept
Slide 3-3
Robert N. West © VEMBA Accounting
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
Basic Concepts
The accounting periodconcept allows us to find
out how we did for a specificperiod of time.
The accounting periodconcept allows us to find
out how we did for a specificperiod of time.
Accounting Period ConceptAccounting Period Concept
Slide 3-4
Robert N. West © VEMBA Accounting
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Basic Concepts Slide 3-5
Robert N. West © VEMBA Accounting
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.
Basic Concepts
Aspects of the conservatism concept:
Slide 3-6
Robert N. West © VEMBA Accounting
When should the revenue be
recognized?
Basic Concepts
In December, customers pay for a year’s subscription to a
magazine that they will begin receiving in
January.
Conservatism ConceptConservatism Concept
Slide 3-7
Robert N. West © VEMBA Accounting
Revenue is recognized when the service is
performed--thus in the year the magazine
service is provided.
Basic Concepts
In December, customers pay for a year’s subscription to a
magazine that they will begin receiving in
January.
Conservatism ConceptConservatism Concept
Slide 3-8
Robert N. West © VEMBA Accounting
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Basic Concepts Slide 3-9
Robert N. West © VEMBA Accounting
Basic Concepts
Realization ConceptRealization Concept
Joe makes credit sales of merchandise Joe makes credit sales of merchandise amounting to $100,000.amounting to $100,000.
Joe makes credit sales of merchandise Joe makes credit sales of merchandise amounting to $100,000.amounting to $100,000.
Slide 3-10
Robert N. West © VEMBA Accounting
Basic Concepts
If experience indicates that 3 percent of credit If experience indicates that 3 percent of credit sales will eventually become bad debts, then sales will eventually become bad debts, then
revenue for the period is $97,000.revenue for the period is $97,000.
If experience indicates that 3 percent of credit If experience indicates that 3 percent of credit sales will eventually become bad debts, then sales will eventually become bad debts, then
revenue for the period is $97,000.revenue for the period is $97,000.
Realization ConceptRealization Concept
Sorry Joe, I can’t pay.
Slide 3-11
Robert N. West © VEMBA Accounting
Basic Concepts
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Slide 3-12
Robert N. West © VEMBA Accounting
Basic Concepts
Matching ConceptMatching Concept
Today is March
19On March 19, an item of inventory costing $1,000 is
received.
Slide 3-13
Robert N. West © VEMBA Accounting
Basic Concepts
Matching ConceptMatching Concept
Today is April
16On April 16, the
vendor is paid in full.
Slide 3-14
Robert N. West © VEMBA Accounting
When should the merchandise be an expense
to the firm?
Basic Concepts
Matching ConceptMatching Concept
Today is May
9On May 9, the item of merchandise is sold
for $1,500.
Slide 3-15
Robert N. West © VEMBA Accounting
In May, when the merchandise is sold.
Basic Concepts
Matching ConceptMatching Concept
Today is May
9On May 9, the item of merchandise is sold
for $1,500.
Slide 3-16
Robert N. West © VEMBA Accounting
Expenditures that are also expenses Beginning assets that become expenses Expenditures that are not yet expenses Expenses not yet paid
Expenditures that are also expenses Beginning assets that become expenses Expenditures that are not yet expenses Expenses not yet paid
Basic Concepts
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.
Slide 3-17
Robert N. West © VEMBA Accounting
Basic Concepts
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Slide 3-18
Robert N. West © VEMBA Accounting
Basic Concepts
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).
LIFOLIFO
Slide 3-19
Robert N. West © VEMBA Accounting
Basic Concepts
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Slide 3-20
Robert N. West © VEMBA Accounting
Basic Concepts Slide 3-21
MaterialityMateriality
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.
Robert N. West © VEMBA Accounting
Income Statement Slide 3-22
GARDEN CORPORATIONIncome Statement
For the Year Ended December 31, 1998Net sales $75,478,221Cost of sales 52,227,004Gross margin 23,251,217Research and development expense 2,158,677Selling, general, and administrative expenses 8,726,696
Operating income 12,356,844Other revenues (expenses):
Interest expense (363,000Interest and dividend revenues 43,533Royalty revenues 420,010
Income before income taxes 12,466,387Provision for income taxes 4,986,555Net income $ 7,479,832
)
Robert N. West © VEMBA Accounting
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
Retained earnings at end of year $19,116,976
Robert N. West © VEMBA Accounting
Chapter 3
The End