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MGAB01H3 (93)
Lecture 3

MGAB01H3 Lecture Notes - Lecture 3: Accrual, Matching Principle, Asset
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2 Pages
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Fall 2018

Department
Management
Course Code
MGAB01H3
Professor
H Levy-Shalev
Lecture
3

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MGAB01 Class3
Class outline:
1. Operating cycle,
2. Classified Statement of earnings elements
3. Accrual versus Cash basis accounting
4. Debit/Credit Framework
1. Operating cycle
a) Purchase material from suppliers via credit
b) Then, pay for these material
c) Produce product or offer service to customer
d) Receive money
It takes time to finish the operating cycle.
Financial information is reported relatively in short time (i.e monthly, quarterly)
Some essential assumption for operating cycle
Time period: the company can operate over a series of short time report period
Recognition issues: figure out which activities’ effect need to be recorded
Measure issues: the amount need to be recorded
We measure a company’s condition periodically via its Classified Statement of
Earnings
2. Classified Statement of earnings elements
Three major element:
The continuing operation: revenue, expense, gain, loss are four factor we use
to calculate profit
The discontinues operation: sometimes company do some adjustment to adapt
market. So they perhaps stop some services or product. We record both
continuing and discontinued because we need these info to predict the profit
company will make.
Earning per share: this info will help the shareholder know how much return
they can get from each share
The company is asked to provide these information
Revenue: from operating activities and other activities. Assets up or liability down
are also show with revenue
Expense: use of the assets and some other activities (i.e interest, loss) Assets
down or liability up
3. Accrual versus Cash basis accounting
Since lots of time, there is time between making revenue and collecting money. So there
are two basis:
Cash basis: recording revenue and expense when we receive the money
Problems: when we record revenue and expense, there is no change with asset

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Description
MGAB01 Class3 Class outline: 1. Operating cycle, 2. Classified Statement of earnings elements 3. Accrual versus Cash basis accounting 4. Debit/Credit Framework 1. Operating cycle a) Purchase material from suppliers via credit b) Then, pay for these material c) Produce product or offer service to customer d) Receive money It takes time to finish the operating cycle. Financial information is reported relatively in short time (i.e monthly, quarterly) Some essential assumption for operating cycle Time period: the company can operate over a series of short time report period Recognition issues: figure out which activitieseffect need to be recorded Measure issues: the amount need to be recorded We measure a companys condition periodically via its Classified Statement of Earnings 2. Classified Statement of earnings elements Three major element: The continuing operation: revenue, expense, gain, loss are four factor we use to calculate profit The discontinues operation: sometimes company do some adjustment to adapt market. So they perhaps stop some services or product. We record both continuing and discontinued because we need these info to predict the profit company will make. Earning per share: this info will help the shareholder know how much return they can get from each share The company is asked to provide these information Revenue: from operating activities and other activities.Assets up or liability down are also show with revenue Expense: use of the assets and some other activities (i.e interAssetsoss) down or liability up 3. Accrual versus Cash basis accounting Sincelots oftime, thereis time between makingrevenueandcollectingmoney. So there are two basis: Cash basis: recording revenue and expense when we receive the money Problems: when we record revenue and expense, there is no change with asset and liability Accrual basis: recording revenue and expense when we do some transactions cause they occur. a) Revenue principle ( when to record revenue) Ownership of risk and reward has changed when transfer made The control of goods has been sold Collection can be promised The revenue amount can be measured The cost of delivery can be measured b) If we collect money before we provide service, we owed customers, it means liability up. We can record as unearned revenue If we provide service before collect money, it means assets up. We can record as account receivable c) Matching principle ( expense) If we pay the money before we get the service, it means assets up. We can record as prepaid xxx.
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