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Lecture

ADMS 1500 2.docx

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Department
Administrative Studies
Course Code
ADMS 1500
Professor
all

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Class 2 1.Finalization of the course outline 2.Use of Top Hat Monocle 3.The Income Statement – Part 1 4.The assignment – groups can be formed during the break 5.The Income Statement – Part 2 Chapter 3: The Income Statement - Link with Balance Sheet (previous and current balance sheet – tells you how the company has done between the two days, amount of the net income get transferred to the balance sheet as part of retain earning - Revenues (revenue recognition) - Expenses (accrual concept) - Income - Retained Earnings (all your losses has been amounted as your deficit) – past profits less your past profits less your dividends The Income Statement - The periodicity concept means chopping up the companies’ operations into one year sub-periods, so that shareholders and others can receive ongoing reports of how well the company performed. – period statements (works one year at a time) The main parts of an income statement are: Revenues - less: Cost of goods sold - leaving: Gross margin (or gross profit) - less: Operating expenses - leaving: Operating profit - less: Interest and tax expense - leaving: Net income The Income Statement: Gross profit (gross margin) is the difference between revenues and the direct costs of goods sold. It is controlled by monitoring the gross profit ratio. Gross profit ratio = gross profit/sales * 100 Operating profit is what is left after the operating expenses have been deducted from the gross profit. It is controlled by monitoring the operating profit as % of sales. Operating profit as % of sales: Operating profit/sales * 100 Net income is what is left over after interest expense and income taxes are deducted from the operating profit. Net income belongs to the shareholders. Revenue Recognition/Realization: We have to make a decision as to when the Revenues are recognized as realized. Revenue recognition date establishes when the profit on the transaction will be recorded as earned. Situations: • Goods physically exchanged for cash sale realized at that time. (Yes recall revenue – good is gone, you have the revenue – done deal) • Goods sold on credit sale at the time of change of legal ownership. (balance outstanding – asset), as long as you sold the good, account receivable • Goods subject to warranty or return make an allowance. (sell something but you can exchange/refund – there’s a transfer of ownership then there is a potential liability for the goods to be returned; you create an allowance (contract assets – reduce account receivable by the amount of allowance by the company on return) • Goods or services cover a period of time  prorate the sale recognition over the period of the sale Revenue Recognition: S Study Problem 2 (page 121) Fanatical Fitness is a health club. At the start of 2011 there was a liability on their balance sheet of $200,000, represen-ting the unused balance of member’s subscriptions paid in 2010 but extending into 2011. During 2011 they sold $1,800,000 of new subscriptions. At the end of 2011 the amount of subscriptions that customers had paid in advance was $500,000. Required: a) How much membership revenue should FF recognize for 2011? (THM do not put $, % or ,) Beginning balance in 2011 $200,000 Added: new subscriptions in 2011 $1,800,000 Revenue Recognition – Problem 3a (page 125) Mary Williams operates a fashion store…About half the sales are for cash or direct debit…The other half of the sales are put on credit cards…At the end of 2011, a woman ordered a wedding dress for $1,000 for delivery in January 2012, and her $250 deposit had been banked with the regular takings. Cash banked from cash sales and debit card transactions in 2011 was $660,000. The amount owed to Mary from the credit card companies at the start of 2011 was $75,000. Cash received from the credit card companies in 2011 was $585,000, and at the end of 2011 the credit card companies still owe her $40,000. Required: calculate Mary’s sales revenues for 2011. Sales Revenue: Cash banked from cash sales & debit card trx $660,000 Cash received from credit card companies 585,000 Deduct: Amt owed by credit card co’s from 2010 (75,000) Add: Amt owed by credit card co’s at end of 2011 40,000 Matching: Cost of Goods Sold When an income statement for a year is prepared the operating expenses have to be matched to the year. Expenses are resources that were used up during a period. In the same way that we recognize revenue when it is earned, not when the cash comes in, we recognize expense when it is used up, not when the cash is paid. Onc
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