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Chapter 5 Income Measurement and the Income Statement
The Revenue Recognition Principle
x Revenues t Increases in economic resources resulting from ordinary activities such as the sale of
goods, rendering of services, or µ}(}Zv]Ç[}µX
x Revenue recognition principle t Revenues are recognized in the income statement when they
o Time-of-sale method t The method used by merchandising and manufacturing
industries to recognize revenue when goods are sold.
o Percentage-of-completion method t The method used by contractors to recognize
revenue before the completion of a long-term contract.
o Production method t The method in which revenue is recognized when a commodity is
produced rather than when it is sold.
o Instalment method t The method in which revenue is recognized at the time cash is
The Matching Principle and Expense Recognition
x Matching Principle t The revenues for the period are associated with the costs of generating
o Certain costs directly generate revenues, so they can be directly matched with them.
o Other costs indirectly generate revenues, so they are matched with the periods they
o Other costs do not give rise to assets because no future benefits from these costs are
discernible, like the cost of heating and lighting. Thus they are treated as expiring
immediately as they are acquired.
o Unexpired Costs are called assets, expired ones, expenses.
The Format and Content of the Income Statement
x Single-step income statement t An income statement in which all expenses are added together
and expenses or associate them with anything.
x Multiple-step income statement t An income statement that shows classifications of revenues
and expenses as well as important subtotals.
o Net Sales t Sales revenue less sales returns and allowances and sales discounts.
o Gross Profit t Sales less cost of goods sold, also termed gross margin.