Chapter 3 notes

4 Pages
Unlock Document

University of Waterloo
Accounting & Financial Management
AFM 101
Donna Psutka

Chapter 3 – operating decisions and the income statement Operating cycle • Long term objective of a business is to turn cash into more cash • Typical operating cycle: purchase goods and services, pays cash to suppliers, sells goods and services to customers, receive cash from customers • The periodicity assumption means that the long life of a company can be reported in shorter periods • Two questions arise when reporting periodic income to users o Recognition issues: when should the effects of operating activities be recognized (recorded)? o Measurement issues: what amount should be recognized? Elements of Income Statement • Three major sections o Results of continuing operations o Results of discontinued operations Profit (the sum of 1 and 2) o Earnings per share • Continuing operations o Operating revenues  Increases in assets or settlement of liabilities from ongoing operations of the business are defined as revenues  Results from the sale of goods or services  This is usually an increase in assets (cash or trade receivables)  Sometimes, a company receives cash in exchange for a promise to provide goods and services in the future • Revenue is not earned, but a liability account (deferred revenue) is created • When company provides the promised goods, revenue is recognized and liability is settled o Operating expenses  Expenditure is any outflow of cash for any purpose whether to buy equipment, pay off a bank loan or pay employees  Expenses results when an asset, such as equipment or supplies is used to generate revenue during a period, such as electricity even if it will be paid in future  Expenses are decreases in assets or increases in liabilities from ongoing operations and are incurred to generate revenues during the period  Example: cost of goods sold and operating expenses (marketing, R&D, distribution)  Difference between sales revenues and cost of goods sold is known as gross profit  Operating profit: sales minus cost of goods sold and other operating expense o Non-operating items  Categorized as other income or expense  When using excess cash to purchase shares of other companies (investing activity)  Any interest or dividends earned on the investment is called investment income  Interest expenses  Gains – increases in assets or decreases in liabilities from peripheral transactions  Profit before income taxes –
More Less

Related notes for AFM 101

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.