Chapter 3.docx

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Financial Accounting
Douglas Kong

Chapter 3 Operating cycle (cash to cash) – time it takes for a company to pay cash to suppliers, sell goods and services to customers and collect cash from customers. For companies to stay in business, excess cash must be generated from operations, not from borrowing money Some companies complete the operating cycle quick while others take a long time Car dealerships take long period of time to receive cash from customers because customers make their payments monthly. A short operating cycle means higher profits and faster growth Periodicity assumption – long life of a company can be reported in shorter periods (months, quarter, year). Two issues from reporting periodic income: 1) recognition issues – when to record the effect of transactions 2) measurement issues – which amounts should be recognized. Classified income statement Classification helps the users assess the company’s operating performance and predict future profitability Three major sections: Results from continuing operations; Results of discontinued operations and Earnings per share Elements of the statement: Revenues – increases iin assets or settlements of liabilities from ongoing operations Expenses – decreases in assets or increases in liabilities to generate revenues during the period. Gains – increases in assets or decrease in liabilities from peripheral activities Loses – decreases in assets or increases in liabilities from peripheral activities What is the difference between expenses and expenditure? Expenditure – any outflow of cash for any purpose Expense – when an asset is used to generate revenue during a period Gross profit = net sale
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