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Lecture 15

MGAB01H3 Lecture Notes - Lecture 15: Asset Turnover, Accrual, Retained Earnings


Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen
Lecture
15

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CHAPTER 3:
OPERATING DECISIONS AND STATEMENT OF EARNINGS
Operating (cash to cash) Cycle : the time takes for company to pay $ to suppliers, sells goods & services
to customers, & collect cash from customers.
Long term objective for business: turn $ to more $
oMust be generated from operations not borrowing or selling NCA
Receives goods sell goods
Depends on nature of business
oSun-Rype relatively short car dealership $ after selling car
Shorten O.C by incentives to buy sooner/ pay faster= improve $ flows= > N.I=faster growth
oPurchase more assets/inventory for growth, repay debt w/ excess $, dis to owners
1.) Purchase goods/services
2.) Pay cash to suppliers
3.) Sell goods/services
4.) Receive cash (pay off liabilities)
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
oIssues: 1.) when should effects of op act be recognized (recorded) & 2.) what amounts
should be recog?
3 major sections:
oResults of continuing op
oResulting of discontinued op
N.E (sum of 1&2)
oEPS
Revenues: increase in assets or settlements of liab from ongoing operations
oDeferred revenue= promise to provide goods/service in future (recognized when
provided)
Expenses= decreases in assets or increase in liabilities to generate revenues during period
Expenditure= outflow of cash for any purpose; expense: when asset used or amt incurred to
generate rev (electricity)
oNot all expend. Are exp and exp necessary to generate rev
1.Cost of sales (COGS):direct costs related to production of goods sold
oGross profit/margin: net sales less cost of sales
2.operating expenses: usual expenses other than COGS
oThree main costs of production: materials, labour & property and
o equipment use
oSales and marketing expenses, distribution expense, general and administrative
oEarnings from operations/operating income= net sales-cost of sales & other operations
Non-operating items:
o1.) investment income interest/dividends earned on investment not including in
operating rev
oFinancing costs financing activity interest exp or arning investment income not
included in operating rev
Gains (increases) & losses (decreases) on disposal of assets from peripheral
transactions
Subject to income taxes & added or subtracted from earnings from operations to obtain earnings
before income tax (pretax): rev-exp except income tax expense
Income tax= last expense
oEffective tax rate: income tax expense/ earnings before income taxes
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