BU227 Chapter Notes - Chapter 3: Financial Statement, Accrual, Deferred Income
Document Summary
How do business activities affect the income statement. When revenues are earned, assets, usually cash or trade receivables, often increase. Sometimes, a company receives cash in exchange for a promise to provide goods or services in the future. At that point, revenue is not earned, but a liability account, deferred revenue, is created. However, the cost of using that money is called interest expense: gains are increases in assets or decreases in liabilities from peripheral transactions. Must disclose this ratio on the income statement: used in evaluating the operating performance and probability of the company, profit/ weighted avg. number of shares outstanding. Cash basis accounting records revenues when cash is received and expenses when cash is paid (used by many small retailers) this is adequate for these organizations who do not need to report to external users. A) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
