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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

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Presentation on theme: "Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin."— Presentation transcript:

1 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2 Chapter 3 Reporting Operating Results on the Income Statement PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

3 Operating Activities Operating activities include buying goods and services from suppliers and employees and selling goods and services to customers and then collecting cash from them. 3-3

4 Income Statement Accounts 3-4

5 Accrual Basis Accounting GAAP Records revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments. Accrual Basis Accounting 3-5

6 Revenue Principle—Revenue Recognition Timing of Reporting Revenue versus Cash Receipts Cash is received in the same period as the goods or services are provided. 1 Cash is received in a period before goods or services are provided. 2 Cash is received in a period after goods or services are provided. 3 Revenue Principle Revenues are recognized when they are earned. 3-6

7 Matching Principle—Expense Recognition Timing of Reporting Expenses versus Cash Payments Cash is paid at the same time as the cost is incurred to generate revenue. 1 Cash is paid before the expense is incurred to generate revenue. 2 Cash is paid after the cost is incurred to generate revenue. 3 Matching Principle Record expenses in the same period as the revenues with which they can be reasonably associated. 3-7

8 ExpensesRevenues - Revenues are recorded with credits. Expenses are recorded with debits. The Expanded Accounting Equation Exhibit 3.7 3-8

9 Pizza Aroma’s Accounting Records (a) Provided services for cash. In September, Pizza Aroma delivered pizza to customers for $15,000 cash. 1 Analyze 2 Record 3 Summarize 3-9

10 Pizza Aroma’s Accounting Records (b) Receive cash for future services. Pizza Aroma sold three $100 gift cards at the beginning of September. 1 Analyze 3 Summarize 2 Record 3-10

11 Pizza Aroma’s Accounting Records (c) Provide services on credit. Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account. 1 Analyze 2 Record 3 Summarize 3-11

12 Pizza Aroma’s Accounting Records (d) Receive payment on account. Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance. 1 Analyze 2 Record 3 Summarize 3-12

13 Unadjusted Trial Balance Cash Ledger Account 3-13

14 Review of Revenues and Expenses (2) Cash is received in the same period the company earns revenue. dr. Cash cr. ________ Revenue $ Earn Revenue (3) Cash is received after the company earns revenue. dr. Cash cr. Accounts Rec. dr. Accounts Rec. cr. ________ Revenue $ Earn Revenue (1) Cash is received before the company earns revenue. dr. Cash cr. Unearned Rev. dr. Unearned Rev. cr. _______ Revenue $ Earn Revenue 3-14

15 Review of Revenues and Expenses (1) Cash is paid before the expense is incurred. dr. Prepaid Expense cr. Cash dr. Business Expense cr. Prepaid Expense $ Use-up Benefits (3) Cash is paid after the expense is incurred. dr. Accounts Payable cr. Cash dr. Business Expense cr. Accounts Payable $ Use-up Benefits (2) Cash is paid in the same period the expense is incurred. dr. Business Expense cr. Cash $ Use-up Benefits 3-15

16 End of Chapter 3


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