ACC 342 Lecture Notes - Lecture 5: Cash Flow, Matching Principle, Net Income
What does the Income Statement do?
Reports increase in shareholders' equity due to operations over a period of time. Is also called
"earnings" or "net profit."
What is the income statement equation?
Net Income = Revenue - Expenses
What are the features of Accrual Accounting?
1. Accounting recognition of revenues and expenses are tied to business activities, not cash flows.
2. Revenues are recognized when goods and services are provided (revenue recognition criteria)...
Revenues does not equal cash inflows
3. Expenses are recognized in the same period as the revenues they helped to generate (matching
principle)... Expenses does not equal cash outflows
* Net income does not equal Net cash flow
What is the definition of "Revenue?"
Revenue is an increase in shareholders' equity (not necessarily cash) from providing goods or services.
What are the conditions of the revenue recognition criteria?
1. It is earned (i.e. goods or services are provided)
2. It is realized (i.e. payment for goods or services received in cash or something that can be converted
to a known amount of cash)
What is the definition of "Expenses?"
Expenses are decreases in shareholders' equity (not necessarily cash) that arise in the process of
generating revenues.
What are the conditions for expenses to be recognized?
find more resources at oneclass.com
find more resources at oneclass.com
Related revenues are recognized (product costs) or incurred, if difficult to match with revenues (period
costs and unusual events).
What are the underlying recognition concepts?
1. Matching principle (product vs.period costs)
2. Conservatism principle (unusual events): recognize anticipated losses immediately, recognize
anticipated gains only when realized.
What is the definition of an asset?
An asset is a resource that is expected to provide future economic benefits (i.e. generate future cash
inflows or reduce future cash outflows)
What is the definition of accounting?
Accounting is a system for recording information about business transactions to provide summary
statements of a company's financial position and performance to users who require such information
What are the three sets of books in accounting?
1. Financial accounting (geared towards external stakeholders)
2. Tax accounting (IRS rules for computing taxes payable)
3. Managerial accounting (custom reports for internal decisions)
What are the financial reporting requirements?
10-K: Annual Report
10-Q: Quarterly Report
8-K: Current Report (Material events)
Who establishes the GAAP?
U.S. Congress delegates to:
Securities and Exchange Commission (SEC) delegates to:
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Reports increase in shareholders" equity due to operations over a period of time. What are the features of accrual accounting: accounting recognition of revenues and expenses are tied to business activities, not cash flows, revenues are recognized when goods and services are provided (revenue recognition criteria) Revenues does not equal cash inflows: expenses are recognized in the same period as the revenues they helped to generate (matching principle) * net income does not equal net cash flow. Revenue is an increase in shareholders" equity (not necessarily cash) from providing goods or services. Expenses are decreases in shareholders" equity (not necessarily cash) that arise in the process of generating revenues. Related revenues are recognized (product costs) or incurred, if difficult to match with revenues (period costs and unusual events). What are the underlying recognition concepts: matching principle (product vs. period costs, conservatism principle (unusual events): recognize anticipated losses immediately, recognize anticipated gains only when realized.
