10 03 Lecture Notes - Chapter 4.docx

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Western University
Business Administration
Business Administration 2257
Baldwin Wallace

Prepare P4-13 for the review lecture. Recognition and Measurement What economic events should be communicated or recognized in the Financial Statement? How should the effects of these economic events be measured in the Financial Statement? 1. Recognition 2. Measurement  Historical cost  Realizable value Timing issues on when you record – for example, do you record your pay when you get your check or at the end of the week? Some things are not recorded (leadership, etc) What value do you record the economic transaction at in the general ledger? Well if I pay $1 million for a building, that’s what I write it as. What if though, you buy a piece of land for $1 million and don’t use it? The amount in your balance sheet could read $1 million even if the land around it is worth $25 million – why not write it as $25 million? According to GAAP – you write it as the amount you paid otherwise on the financial statement you have a mixture of dollars and values. Net realizable value (NRV). Under the new IFRS you can write up the value of your fixed asset to reflect a realizable value. Cash vs Accrual Accounting Cash Accounting  Transactions recorded only on exchange of cash If you get a bill and don’t pay it for 45 days, you record it when it’s paid. So it’s like that never occurred for 45 days. It can lead to large gaps. Accrual Accounting  Transaction recorded when main economic event occurs  Exchange of cash is not the critical event  Occurs because of the accounting assumption related to time period The exchange of cash is not critical. You record bills when you get them (debit lawyer expense and credit accounts payable) Erie Co. – Cash Basis Y1 Y2 Y3 Total Services 75,000 37,500 51,000 163,500 Cash 0 85,000 78,500 163,500 Rev. 0 85,000 78,500 163,500 Y1 – no entry Y2 Dr. Cash 85,000 Cr. Revenue 85,000 Saginaw Inc. – Accrual Basis Y1 Y2 Y3 Total Services 75,000 37,500 51,000 163,500 Cash 0 85,000 78,500 163,500 Rev. 75,000 37,500 51,000 163,500 Y1 Dr. A/R 75,000 Cr. Revenue 75,000 Y2. Dr. Cash Dr. A.R 27,500 Cr. Revenue 37,500 Cr. A/R 75,000 Year 1 Year 2 Year 3 Sales 360,000 Equipment 100,000 S & Wage 50,000 Advertising 5,000 Rent & Utility 36,000 Net I/(L) 169,000 (1,000) (1,000) Year 1 Year 2 Year 3 Sales 120,000 150,000
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