Libby6e Chapter 03SPpt

8/9/2019 Libby6e Chapter 03SPpt

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Operating Decisions andOperating Decisions and

the Income Statementthe Income StatementChapter 3

McGraw-Hill/Irwin © 200 !he McGraw-Hill Companies" Inc#


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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3

%lements on the Income Statement

LossesLossesDecreases in assets or increases inDecreases in assets or increases in

liabilities from peripheral transactions.liabilities from peripheral transactions.

LossesLossesDecreases in assets or increases inDecreases in assets or increases in

liabilities from peripheral transactions.liabilities from peripheral transactions.

RevenuesRevenuesIncreases in assets or settlement ofIncreases in assets or settlement ofliabilities from ongoing operations.liabilities from ongoing operations.

RevenuesRevenuesIncreases in assets or settlement ofIncreases in assets or settlement ofliabilities from ongoing operations.liabilities from ongoing operations.

ExpensesExpenses

Decreases in assets or increases inDecreases in assets or increases inliabilities from ongoing operations.liabilities from ongoing operations.

ExpensesExpenses

Decreases in assets or increases inDecreases in assets or increases inliabilities from ongoing operations.liabilities from ongoing operations.

GainsGainsIncreases in assets or settlement ofIncreases in assets or settlement of

liabilities from peripheral transactionsliabilities from peripheral transactions ..

GainsGainsIncreases in assets or settlement ofIncreases in assets or settlement of

liabilities from peripheral transactionsliabilities from peripheral transactions ..


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McGraw-Hill/Irwin Slide *McGraw-Hill/Irwin Slide *

)e*en(e +rinciple

When the company delivers the goods orWhen the company delivers the goods orservicesservices UNEARNED REVENUE UNEARNED REVENUE is reducedis reduced

andand REVENUE REVENUE is recorded.is recorded.

Cash received before revenue is earned -

CashReceived

CompanyDelivers

Cash (+A) !nearned revenue (+")

Revenue #ill be recorded #hen earned.


7/15McGraw-Hill/Irwin Slide +McGraw-Hill/Irwin Slide +

)e*en(e +rinciple

CASH COLLECTED(Goods or services due to

customers)over time will

ecome

RE!E"#E(Earned w$en %oodsor services provided)

Rent collected in advance Rent revenue

#nearned air tra&&ic revenue Air tra&&ic revenue

De&erred su scription revenue Su scription revenue

,ypical liabilities that become,ypical liabilities that becomerevenue hen earned include . . .revenue hen earned include . . .


8/15McGraw-Hill/Irwin Slide -McGraw-Hill/Irwin Slide -

)e*en(e +rinciple

CashReceived

Accounts receivable (+A) Revenue (+R)

Cash received after revenue is earned -CompanyDelivers

When the cash is received theWhen the cash is received the ACCOUNTS ACCOUNTSRECEIVABLE RECEIVABLE is reduced.is reduced.

Cash #ill be collected.


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10/15McGraw-Hill/Irwin Slide /0McGraw-Hill/Irwin Slide /0

!he Matching +rinciple

ResourcesResourcesconsumed to earnconsumed to earn

revenues in anrevenues in anaccounting periodaccounting period

should be recordedshould be recordedin that period$in that period$

regardless of whenregardless of whencash is paid cash is paid ..

ResourcesResourcesconsumed to earnconsumed to earn

revenues in anrevenues in anaccounting periodaccounting period

should be recordedshould be recordedin that period$in that period$

regardless of whenregardless of whencash is paid cash is paid ..


11/15McGraw-Hill/Irwin Slide //McGraw-Hill/Irwin Slide //

!he Matching +rinciple

% pense&ncurred

When the e pense is incurredWhen the e pense is incurred PREPAIDPREPAIDE PENSE E PENSE is reduced and anis reduced and an E PENSE E PENSE isis

recorded.recorded.

Cash is paid before e pense is incurred -

'aid

repaid e pense (+A) Cash (-A)

% pense #ill be recorded #henincurred.


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A . L / SEASSETSASSETS

De it&or

)ncrease

Credit&or

Decrease

L)A')L)T)ESL)A')L)T)ES

De it&or

Decrease

Credit&or

)ncrease

RETA)"EDRETA)"ED

EAR")"GSEAR")"GS

De it&or

Decrease

Credit&or

)ncrease

CO"TR)'#TEDCO"TR)'#TED

CA*)TALCA*)TAL

De it&or

Decrease

Credit&or

)ncrease

1e"t% let s see ho1e"t% let s see hoRevenues andRevenues and

!"penses affect!"penses affectRetained !arnings.Retained !arnings.



How are ,inancial Statements+repared

)ncome)ncomeStatementStatement Revenues !"penses 1et Income

Statement o& Statement o& RetainedRetainedEarnin%sEarnin%s

Beginning Retained !arnings5 1et Income

( Dividends Declared !nding Retained !arnings

'alance'alanceS$eetS$eet

$ssets 6iabilities 5 Stoc7holders !'uity

8ontributed 8apitalRetained !arnings

StatementStatemento& Cas$ +lowso& Cas$ +lows

8hangein

8ash

8ash from 9perating $ctivities5 8ash from Investing $ctivities5 8ash from :inancing $ctivities


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Libby6e Chapter 03SPpt