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
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
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
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