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Final

ACC 100 Study Guide - Final Guide: Cash Flow Statement, Gross Margin, Revenue Recognition


Department
Accounting
Course Code
ACC 100
Professor
Walter Krystia
Study Guide
Final

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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}(}Zv]Ç[}µX
x Revenue recognition principle t Revenues are recognized in the income statement when they
are earned.
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
collected.
The Matching Principle and Expense Recognition
x Matching Principle t The revenues for the period are associated with the costs of generating
those revenues.
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
provide benefit.
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
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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.
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o Cost of goods available for sale t Beginning inventory plus cost of goods purchased.
o Cost of goods sold t Cost of goods available for sale minus ending inventory.
o Gross Profit Margin = Gross Profit / Net Sales
This indicates the amount of each net sales dollar left after cost of goods sold.
x Operating Expenses and Income from Operations t Income from operations is the difference
between gross profit and total operating expenses. A healthy income from operations can
indicate a healthy financial future.
x Other Revenues and Expenses and Income before Income Taxes t Any outflow or inflow of
assets resulting from non-operating activities.
x Profit Margin = Net Income / Net Sales
o The ratio of net income to net sales indicates the amount of each net sales dollar left as
profit after all expenses are covered.
How Sales Affect the Cash Flow Statement
x Direct method used to prepare the Operating Activities category of the cash flow statement:
o The amount of cash collected from customers is shown as positive cash flow.
x Indirect method used to prepare the Operating Activities category of the cash flow
statement:
o It is necessary to make adjustments to net income for the changes in accounts
receivable. An increase in accounts receivable is deducted because it indicates the
company is tying up its cash in these accounts. A decrease is added to net income
because the company actually reduced the amount owed by customers and collected
cash.
Chapter 6 Inventories and Cost of Goods Sold
Inventory Systems
x Periodic system t System in which the inventory accounts is updated only at the end of the
period.
o Purchases t Account used in a periodic inventory system to record acquisitions of
merchandise.
x Perpetual system t System in which the inventory account is increased at the time of each
purchase and decreased at the time of each sale.
x Purchase returns and allowances t Contra-purchases account used in a periodic inventory
system when a refund is received from a supplier or a reduction is given in the balance owed to
a supplier.
x Purchase discounts t Contra-purchases account used to record reductions in purchase price for
early payment to a supplier.
x CIF destination point t Terms that require the seller to pay for the cost of shipping the
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