Copyright © 2016 by McGraw-Hill Education. Chapter 3 The Income Statement PowerPoint Author: Brandy Mackintosh, CA

Copyright © 2016 by McGraw-Hill Education .

Chapter 3The Income Statement

PowerPoint Author:Brandy Mackintosh, CA

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Learning Objective 3-1

Describe common operating transactions and select

appropriate income statement account titles.

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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.

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Income Statement Accounts

Time Period Assumption: dividing the company’s long life into shorter chunks of time

such as months, quarters, and years.

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Cash Basis Accounting

Cash basis accounting records revenues when cash

is received and expenses when cash is paid.

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Explain and apply the revenue and expense recognition

principles.

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Accrual Basis Accounting

GAAP/IFRSRecords revenues when they are earned and expenses in the same

period as the revenues to which they relate, regardless of the timing of

cash receipts or payments.

Accrual Basis Accounting

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Revenue Recognition Principle

Timing of Reporting Revenue versus Cash Receipts

Revenue Recognition PrincipleRevenues are recognized when they are

earned.

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Expense Recognition Principle (“Matching”)

Timing of Reporting Expenses versus Cash Payments

Record expenses in the same period as the revenues with which they can be reasonably

associated.

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Analyze, record, and summarize the effects of operating

transactions using the accounting equation, journal entries, and

T-accounts.

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The Expanded Accounting Equation

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SonicGateway’s Accounting Records(a) Sell games for Cash.

In September, SonicGateway sold $3,000 of games at its online store.

2 Record

(a) Cash (+A) Sales Revenue (+R, +SE) 3,000

3,000

3 Summarize

Beg. Bal.(a)

Cash (A)dr + cr -

20,7003,000

Beg. Bal.(a)

Sales Revenue (R, SE)dr - cr +

03,000

1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+

(a) Cash +$3,000

SalesRevenue (+R) +$3,000

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(b) Receive cash for future services.

SonicGateway issued three $100 gift cards at the beginning of September.

3 Summarize

Beg. Bal.(a)(b)

Cash (A)dr + cr -

20,7003,000

300

Beg. Bal.(b)

Unearned Revenue (L)dr - cr +

0300


(b) Cash +$300

UnearnedRevenue +$300

2 Record

(b) Cash (+A) Unearned Revenue (+L) 300

300

SonicGateway’s Accounting Records

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(c) Sell apps on credit.

SonicGateway sold $9,000 of apps in the App Store and on Google Play.

2 Record

(c) Accounts Receivable (+A) Sales Revenue (+R, +SE) 9,000

9,000

3 Summarize

Beg. Bal.(c)

Accounts Receivable (A)dr + cr -

09,000

Beg. Bal.(a)(c)

Sales Revenue (R, SE)dr - cr +

03,0009,000



(c) Accounts Receivable +$9,000

SalesRevenue (+R) +$9,000

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(d) Receive payment on account.

SonicGateway received checks totaling $8,500 from Apple and Google,on account.


(d) Cash +$8,500 Accounts Receivable -$8,500

2 Record

(d) Cash (+A) Accounts Receivable (-A) 8,500

8,500

3 Summarize

Beg. Bal.(a)(b)(d)

Cash (A)dr + cr -

20,7003,000

3008,500

Beg. Bal.(c) (d)

Accounts Receivable (A)dr + cr -

09,000 8,500


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(e) Pay cash to employees.

SonicGateway wrote checks to employees totaling $7,800 for wages related to hours worked in September.

2 Record

(d) Salaries and Wages Expense (+E, -SE) Cash (-A) 7,800

7,800

3 Summarize

Beg. Bal.(a)(b)(d)

(e)

Cash (A)dr + cr -

20,7003,000

3008,500

7,800Beg. Bal.(e)

Salaries & Wages Expense (E, SE)dr + cr -

07,800


1 AnalyzeLiabilitiesAssets Stockholders’ Equity+

(e) Cash -$7,800

Salaries & WagesExpense (+E) -$7,800

=

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(f) Pay cash in advance.

On September 1, SonicGateway paid $7,200 in advance forSeptember, October, and November rent.

2 Record

(f) Prepaid Rent (+A) Cash (-A) 7,200

7,200

3 Summarize

Beg. Bal.(a)(b)(d)

(e)(f)

Cash (A)dr + cr -

20,7003,000

3008,500

7,8007,200

Beg. Bal.(f)

Prepaid Rent (A)dr + cr -

07,200


(f) Cash -$7,200 Prepaid Rent +$7,200


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(g) Incur cost to be paid later.

SonicGateway displayed Facebook sidebar ads inSeptember and received a bill for $500 to be paid in October.

3 Summarize

Beg. Bal(g)

Accounts Payable (L)dr - cr +

10,200500

Beg. Bal.(g)

Advertising Expense (E, SE)dr + cr -

0500

2 Record

(g) Advertising Expense (+E, -SE) Accounts Payable (+L) 500

500



(g) Accounts Payable + $500

AdvertisingExpense (+E) -$500

=

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(h) Pay cash for expenses.

SonicGateway was notified by its bank that an automatic monthly payment of $600 was transmitted to its utility company for electricity use in September.

2 Record

(h) Utilities Expense (+E, -SE) Cash (-A) 600

600

3 Summarize

Beg. Bal.(a)(b)(d)

(e)(f)(h)

Cash (A)dr + cr -

20,7003,000

3008,500

7,8007,200

600

Beg. Bal.(h)

Utilities Expense (E, SE)dr + cr -

0600



(h) Cash -$600 UtilitiesExpense (+E) -$600

=

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Prepare an unadjusted trial balance.

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Unadjusted Trial Balance

Cash Ledger Account

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Review of Revenues

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Review of Expenses

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Evaluate net profit margin,but beware of income

statementlimitations.

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Net Profit MarginNet Profit Margin

= Net IncomeRevenue

Net income = Revenues – Expenses

= $12,000 - $8,900 = $3,100

0.258or 25.8%

=$3,100

$12,000

=

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Income Statement Limitations

NI Cash

NI Value

NI Exact

Copyright © 2016 by McGraw-Hill Education .

Chapter 3Solved Exercises

M3-2, M3-3, M3-4, M3-5, M3-13, M3-14

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M3-2 Identifying Accrual Basis RevenuesThe following transactions are July activities of Bill’s Extreme Bowling Inc., which operates several bowling centers. If revenue is to be recognized in July, indicate the amount. If revenue is not to be recognized in July, explain why.

Activity Amount or Explanation

a.

b.

c.

d.

Bill’s collected $12,000 from customers for services related to games played in July.

$12,000

Bill’s billed a customer for $250 for a party held at the center on the last day of July. The bill is to be paid in August.

$250

The men’s and women’s bowling leagues gave Bill’s advance payments totaling $1,500 for the fall season that starts in September.

No revenue is earned in July. The revenues will be earned when fall bowling service is provided (i.e., when the games are played).

Bill’s received $1,000 from credit sales made to customers last month (in June).

No revenue is earned in July. The cash collections in July related to revenues earned in June.

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M3-3 Identifying Accrual Basis ExpensesThe following transactions are July activities of Bill’s Extreme Bowling, Inc., which operates several bowling centers. If an expense is to be recognized in July, indicate the amount. If an expense is not to be recognized in July, explain why.

Activity Amount or Explanation

a.

b.

c.

Bill’s paid $1,500 to plumbers for repairing a broken pipe in the restrooms.

$1,500

Bill’s paid $2,000 for the June electricity bill and received the July bill for $2,500, which will be paid in August.

$2,500 was incurred as an expense in July. The $2,000 was an expense in June and is not an expense in July.

Bill’s paid $5,475 to employees for work in July.

$5,475

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M3-4 Recording Accrual Basis RevenuesFor each of the transactions in M3-2, write the journal entry using the format shown in the chapter.

a. Cash (+A) 12,000

Service Revenue (+R, +SE) 12,000 b. Accounts Receivable (+A) 250

Service Revenue (+R, +SE) 250 c. Cash (+A) 1,500

Unearned Revenue (+L) 1,500 d. Cash (+A) 1,000

Accounts Receivable (A) 1,000

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M3-5 Recording Accrual Basis ExpensesFor each of the transactions in M3-3, write the journal entry using the format shown in the chapter.

a. Repairs and Maintenance Expense (+E, SE) 1,500

Cash (A) 1,500

b. Accounts Payable (–L) 2,000Cash (A) 2,000

Utilities Expense (+E, SE) 2,500Accounts Payable (+L) 2,500

c. Salaries and Wages Expense (+E, SE) 5,475Cash (A) 5,475

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M3-13 Preparing Accrual Basis Journal Entries for Business ActivitiesQuick Cleaners, Inc. (QCI) has been in business for several years. It specializes in cleaning houses but has some small business clients as well. Prepare journal entries for the following transactions, which occurred during a recent month, and determine QCI’s preliminary net income.

a. Issued $25,000 of QCI stock for cash.b. Incurred $600 of utilities costs this month and will pay them

next month.

a. Cash (+A) 25,000 Common Stock (+SE) 25,000

b. Utilities Expense (+E -SE) 600 Accounts Payable (+L) 600

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M3-13 Preparing Accrual Basis Journal Entries for Business Activitiesc. Paid wages for the current month totaling $2,000.d. Performed cleaning services on account worth $2,800.e. Some of Quick Cleaners’ equipment was repaired at a total

cost of $150. The company paid the full amount at the time the repair work was done.

c. Salaries and Wages Expense (+E -SE) 2,000Cash (-A) 2,000

d. Accounts Receivable (+A) 2,800Service Revenue (+R +SE) 2,800

e. Repairs and Maintenance Expense (+E -SE) 150Cash (-A) 150

Preliminary Net Income = Revenues – Expenses = $2,800 - $2,000 - $600 - $150 = $50

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M3-14 Preparing Accrual Basis Journal Entries for Business ActivitiesJunktrader is an online company that specializes in matching buyers and sellers of used items. Buyers and sellers can purchase a membership with Junktrader, which provides them advance notice of potentially attractive offers. Prepare journal entries for the following transactions, which occurred during a recent month, and determine Junktrader’s preliminary net income.a. Junktrader provided online advertising services for another

company for $200 on account.b. On the last day of the month, Junktrader paid $50 cash to

run an ad promoting the company’s services. The ad ran that day in the local newspaper.

a. Accounts Receivable (+A) 200Service Revenue (+R +SE) 200

b. Advertising Expense (+E -SE) 50Cash (-A) 50

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M3-14 Preparing Accrual Basis Journal Entries for Business Activitiesc. Received $200 cash in membership fees for the month from

new members.d. Received an electricity bill for $85 for usage this month. The

bill will be paid next month.e. Billed a customer $180 for helping them sell their junk. The

customer is expected to pay by the end of next month.

c. Cash (+A) 200Service Revenue (+R +SE) 200

d. Utilities Expense (+E -SE) 85Accounts Payable (+L) 85

e. Accounts Receivable (+A) 180Service Revenue (+R +SE) 180

Preliminary Net Income = Revenues – Expenses = $200 + $200 + $180 - $50 - $85 = $445

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End of Chapter 3

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Copyright © 2016 by McGraw-Hill Education. Chapter 3 The Income Statement PowerPoint Author: Brandy Mackintosh, CA