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BU127 (159)
Chapter 3

BU127 Chapter 3 Notes.docx

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James Moore

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BU127 Chapter 3 Notes How do Business Activities Affect the Income Statement? Operating Cycle • The system has 4 main steps 1. Purchase goods and services 2. Pay Cash to Suppliers 3. Sell goods and services to customers 4. Receive cash from customers 5. Start at 1. Again • Operating (Cash to Cash Cycle) o Is the time it takes for a company to pay cash to suppliers, sell goods and  services to customers and collect cash from customers • Periodicity Assumption o Means that the long life of a company can be reported in shorter periods o Two types of issues arise in reporting periodic income to users: 1. Recognition issues: When should the effects of operating  activities be recognized (recorded)? 2. Measurement issues: What amounts should be recognized? Elements of the Income Statement • Classification of the various income statement items helps financial statement  users assess the company’s operating performance and predict its future  profitability • Major sections the income statements includes: 1. Results of continuing operations 2. Results of discontinued operations Profit (the sum of 1 and 2) 3. Earnings per Share Continuing Operations • This section presents the results of continuing operations Operating Revenues • Increase in assets or settlements of liabilities from ongoing operations of  the business are defined as revenues, result from the sale of goods or  services Operating Expenses • Expenses: are decreases in assets or increases in liabilities to generate  revenues during the period • Expenditures: is any outflow of cash for any purpose, whether to buy  equipment, pay off a bank loan or pay employees their wages • Gross Profit (Gross Margin): is net sales less cost of goods sold • Operating Profit: (profit from operations) equals net sales less cost of  goods sold and other operating expenses Non­operating Items • Investing and Financial activities are not categorized in the operating  expenses of the business • Peripheral: normal but not central transactions • Gains: increases in assets and decrease in liabilities from peripheral  transactions • Losses: decreases in assets and increase in liabilities from peripheral  transactions Income Tax Expense • All­for­profit corporations are required to compute income taxes owed to  various government leve
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