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MGCR 211 (10)
Chapter 2

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Department
Management Core
Course
MGCR 211
Professor
Julia Scott
Semester
Fall

Description
Chapter 2 Principles: - Historical Cost Principle o Costs of assets should be recorded at the original price you paid to acquire it (not current market value) - Revenue Recognition o Record revenue when service is performed or product is delivered (NOT when payment is received) - Matching Principle o When you recognize a revenue, you must recognize the associated costs at the same time even if they occur at different times o To ensure accurate presentation of net income o To recognize revenue, you will have to balance the trade off to provide best information to financial statement users  Estimate returns  Estimate warranty expense  Estimate % uncollectible  Estimate % of completion  Full Disclosure o Company provides all information that is relevant for investors to make decisions - Financial Statements Should Have the Following Qualitative Characteristics: o Relevance  Information disclosed may influence user’s decision o Reliability  All numbers can be proven (variability), is representative of actual company situation (representational), can be trusted accurate (faithfulness), and made in an objective manner (neutrality) o Comparability  Can be used to compare to other companies o Consistency  Consistent format over time Chapter 3 Transactions - Transactions are events that must be recorded in the financial statement - 2 types: 1. External: between company and outside party. Involves any exchange of assets, liabilities or equity. (Majority of transactions are external) 2. Internal (adjusting entries): within the company if event results in a financial impact that you can measure with reasonable accuracy.  Prepayments (got or spent cash before): Falls under assets  Depreciation: affects depreciation expense and accumulated depreciation  Accrual (where cash flow will be later)  Example: Interest payable and interest expense  Correct Errors: NEVER cash Account - An individual listing or record of changes in a specific asset, liability or equity - Transaction affect two or more accounts 1. Crated T accounts which were used to prepare an opening balance sheet 2. The T accounts were used to record the revenue and expenses. This was used to prepare the statement of earning 3. Trial balance was created 4. Transferred net earnings to retained earnings by adding it to the opening balance 5. Prepared the ending balance sheet GAAP - Uses Accrual Accounting to measure performance o Accrual Accounting recognizes the difference between when the transaction occurs and when the cash is received or paid. o Results in additional accounts on the balance sheet & Statement of Earnings and requires decision about when to record some transactions - 3 Basic Principles of GAAP 1. Accrual Accounting: o Revenues & expenses recognized based on performance not when the cash flow occurs 2. Revenue Recognition: o Revenue should be matched to the period it was earned. Revenue is earned from operations (not selling shares to investors) 3. Matching: o Expenses should be matched to the revenues that they help generate Revenue Recognition - Trade off between timely info and reliability - Unearned revenue is a liability - When one of the following conditions are met: o The earnings process is substantially complete (revenue is earned) o Collection risk is normal (probable) o The amount is measur
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