AFM101 Study Guide - Midterm Guide: Retained Earnings, Accounting Equation, Accrual
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AFM101 Full Course Notes
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Recognition issues: when should the effects of operating activities be recognized (recorded) Assets (usually cash or trade receivables) increase when revenues are earned. Different from expenditures which is any outflow of cash for any purpose. Expenses only occur when an asset is used to generate revenue or when an amount is incurred to generate revenues during a period (ex. Cost of sales (aka cost of goods sold) = inventories used to produce and package the squeezed fruits and become an expense: gross profit or gross margin = net sales cost of sales. = usual expenses other than cost of sales: ex. Interest expense: gains (or losses) on disposal of assets. Gains = increases in assets or decreases in liabilities from peripheral transactions. Losses = decreases in assets or increases in liabilities from peripheral transactions: earnings before income taxes (pre-tax earnings) = revenues minus all expenses except income tax expense. Income tax expense: last expense on the soe.