Chapter 3 Operating Decisions and the Income Statement.docx

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Department
Accounting & Financial Management
Course
AFM 101
Professor
Donna Psutka
Semester
Fall

Description
Chapter 3: Operating Decisions and the Income Statement 9/15/2013 7:46:00 PM - long term objective of any business is to turn cash into more cash - operating cycle/cash-to-cash cycle: the length of time between the payment of cash to suppliers or inventory and to employees and the collection of cash from customers (this length depends on the nature of the business) - shortening the operating cycle means higher profits and faster growth - to measure income for the period, they face two issues: 1. Recognition issues 2. Measurement issues: how much? Income Statement: 1. Operating activities (central focus of the business) 2. Subtotal of operating revenues minus operating expenses 3. Peripheral activities (not the main focus of the activity) 4. Subtotal of all income minus all expenses except taxes and results of investments in associated companies 5. Allocation of the profit between the controlling shareholder or parent company and the non-controlling shareholders 6. Profit divided by weighted average number of shares outstanding (EPS) Continuing Operations 1. Operating Revenues - result in a sale of goods and ownership (recognize it when there is a transfer of ownership from the seller to the buyer) - sometimes a company receives cash/receivables for a promise to provide goods or services in the future (this is called deferred revenue-liability) - only when the service is performed or the company provides the goods, then it is recognized as revenue 2. Operating Expenses - expenditure: any outflow of cash for any purpose - expense: it results when an asset (equipment or supplies) is used to generate revenue during a period, or when an amount is incurred to generate revenues during a period (electricity) - expenses are decreases in assets or increases in liabilities - some primary operating expenses are: - Cost of Goods Sold: the cost of products sold to customers - some companies classify their expenses by function: Distribution (relates to the distribution of the products to its customers – wages), marketing and administrative (promotion of goods, insurance, electricity and other expenses not directly related to production), and research and development (relates to the research and development of new products) Non-Operating Items - any revenues, expenses, gains, or losses that result from other act
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