1. Chapter : Measurement and Reporting of Revenues and Expenses , Gains and Losses

2. GROSS PROFIT FORMULA INSTALLMENT METHOD
Under installment method, each cash collection from a customer consists of
1) a partial recovery of the cost of goods sold and
2) partial gross profit from the sale.
The formula to recognize gross profit is shown below.
Cash Collections from Customers
Gross Profit Percentage x =
Gross Profit Recognized during the Period

3. GROSS PROFIT RECOGNIZED INSTALLMENT METHOD
Accounting Theory ( 6th edition)
Wolk, Dodd & Tearney
Copyright 2004
GROSS PROFIT RECOGNIZED INSTALLMENT METHOD
An Iowa farm machinery dealer had installment sales in its first year of operations of $600,000 and a cost of goods sold on installment of $420,000. Therefore, total gross profit is $180,000 ($600,000 - $420,000), and the gross profit percentage is 30% ($180,000 ÷ $600,000). The collections on the installment sales were: First year, $280,000 (down payments plus monthly payments), second year, $200,000, and third year, $120,000. The collections of cash and recognition of the gross profit are summarized below (ignoring interest charges).
Chapter 1: An Introduction to Accounting Theory

4. Expenses:
- The definition :Are outflows or other using up of assets of entity or incurrence of its liabilities during a period from delivering or producing goods rendering services or carrying out other activities that constitute the entity’s ongoing major or central operations .

5. Expenses: The definition :
According to the asset/liability view, Expenses are defined as decreases in the assets or increases in the liabilities arising from the use of economic resources or services during a given period

6. Expenses
According to the revenue/expense view, Expenses comprise all of the expired costs that correspond to the revenues of the period.

7. Measurement of Expenses :
A logical measurement is the value (exchange price) of the goods and services at the time they are used in operations of the enterprise .
Generally, the measurement of expenses is made on the basis of historical cost . But due to rapid changes in prices, replacement cost or current cash equivalents have also been proposed.

8. Notes Distinguish between ( Expenditure – Payment – Expenses)
1- Expenditure is an outflow of assets , any resource , not just cash.
2- Payment is an outflow of cash.
3- Expense is a using up of resource during a period.

9. Expense Recognition
- an expense is defined as:
‘consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, that result in a decrease in equity during the reporting period’
An expense should be recognized when:
it is probable that the expense has been incurred; and
the amount of the expense can be reliably measured

10. Expense Recognition
* Generally, Expenses should be recognized in the period in which the associated revenue is recognize.
* Expense recognition in three possible ways:
1- Some expenses , such as cost of goods sold ,are matched with revenues – they are recognized upon recognition of revenue that result directly from the same transaction or other events as the expenses.

11. Expense Recognition * Expense recognition in three possible ways:
2- Many expenses ,such as selling and administrative salaries, are recognized during the period in which cash is spent or liabilities are incurred for goods and services.
3- Some expenses , such as depreciation, are allocated by systematic and rational procedure to the periods during which the related assets are expected to provide benefits.

12. Reporting Expenses Reporting in financial Statements.
Under accrual basis of accounting ,all expenses , whether paid or unpaid ,which have been incurred in earning revenues during a period , should be reported.
Classification of expenses that might be useful to investors and others in making prediction or evaluating current management, expenses should be classified and describe according to whether they are variable or fixed in nature with respect to production or sales volume or whether they vary with respect to some other factors.

13. Gains and losses
- Gains : Are increase in equity from incidental transaction of an entity and from all other transaction affecting the entity during the period except those that result from revenues or investment by owners.

14. Gains and losses
- Losses :Are decrease in equity from incidental transaction of an entity and from all other transaction affecting the entity during the period except those that result from expenses or distributions by owners.

15. Gains and losses
According to the asset/liability view, gains are defined as increases in net assets other than increases from revenues or from changes in capital.
Losses are defined as decreases in net assets other than decreases from expenses or from changes in capital
Thus, gains and losses constitute that part of income not explained by revenues and expenses

16. Gains and losses
According to the revenue/expense view, gains are defined as the excess of proceeds over the cost of assets sold, or other benefits obtained at no cost or sacrifice.
Losses are defined as the excess of the cost of assets sold over the proceeds, or as costs that expire without producing revenues.

17. Relationships between income and components of income
Three major relationships exist between income and the components of income:
Income = Revenues – Expenses + Gains – Losses
Income = Revenues – Expenses
Income = Revenues (including gains) – Expenses (including losses)

18. Relationships between income and components of income
In 1., each component is separate and essential to a definition of income
In 2., gains and losses are not separate and are not essential to the definition of income. All increases and decreases are treated similarly as either revenues or expenses
In 3., although gains and losses are separate concepts, they are part of revenues and expenses