ACCT 1209 Chapter Notes - Chapter 3: Income Statement, Net Income, Accrual

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redmanatee539

16 Dec 2016

School

Northeastern University

Department

Accounting

Course

ACCT 1209

Professor

Ganesh Krishnamoorthy

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Chapter 3: Transactions that Affect the Income Statement

Elements on the Income Statement:

Revenues: Increases in assets/settlements of liabilities from ongoing operations

Expenses: Outflows/using up assets/increase in liabilities

Expenditure: Outflow of cash for an purchase*

• Not all expenditures are expenses

Time Period Assumption: Indicates that the long life of a company can be reported in shorter time periods (months,

quarters, years)

Operating Income (Income from Operations): Operating Revenue – Operating Expenses

Gains: Increases in assets/decreases in liabilities from peripheral transactions

Losses: Decreases in assets/increases in liabilities from peripheral transactions

Income before Income Taxes (Pre-tax) Income: Last expense on income statement before determining net income

Earnings Per Share (EPS): Net Income

Weighted average of # of shares outstanding

• You will note that the earnings (EPS) ratio is reported on the income statement.

• It is widely used in evaluating the operating performance and profitability of a company

Net Profit Margin: Net Income

Net Sales/Operating Revenue

• % of Sales stockholders make as a profit

Cash basis accounting: records revenues when cash

is received and expenses when cash is paid out

Revenues (= Cash Receipts)

- Expenses (= Cash Payments)

Net income

Accrual basis accounting: records revenues when

earned, and expenses when occurred, regardless of

timing of cash receipts/payment

Revenues (= When earned)

- Expenses (= when incurred)

Net income

Unearned revenue = Liability

Revenue Realization Principal: States that revenues are recognized when

1. Goods/services are delivered

2. There is persuasive evidence of an argument for customer payment

3. Price is fixed/determinable

4. Collection is reasonable assured

Paid before delivery

Same period as Delivery

Pay after delivery

On receipt of $100 cash deposit

Cash (+A) 100

Unearned revenue (+L) 100

RECORD REVENUE HERE

On delivery of ordered food for $50 on

account

Accounts Receivable (+A) 50

Sales Revenue (+R, +SE) 50

On delivery of ordered food

Unearned revenue (-L) 100

Sales Revenue (+R, +SE) 100

On delivery of ordered food for $12 cash

Cash (+A) 12

Sales Revenue (+R, +SE) 12

On receipt of cash after delivery

Cash (+A) 50

Accounts Receivable (-A) 50

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Document Summary

Chapter 3: transactions that affect the income statement. Revenues: increases in assets/settlements of liabilities from ongoing operations. Expenditure: outflow of cash for an purchase: not all expenditures are expenses. Time period assumption: indicates that the long life of a company can be reported in shorter time periods (months, quarters, years) Operating income (income from operations): operating revenue operating expenses. Gains: increases in assets/decreases in liabilities from peripheral transactions. Losses: decreases in assets/increases in liabilities from peripheral transactions. Income before income taxes (pre-tax) income: last expense on income statement before determining net income. Earnings per share (eps): you will note that the earnings (eps) ratio is reported on the income statement. It is widely used in evaluating the operating performance and profitability of a company. Net profit margin: % of sales stockholders make as a profit. Cash basis accounting: records revenues when cash is received and expenses when cash is paid out. Revenue realization principal: states that revenues are recognized when.

Related Questions

Statement of Cash Flows
Angela's Cleaning Consortium			Seymour-Johnson, Inc.
Comparative Balance Sheet			Income Statement
December 31, 2020 and 2019			For the Year Ended December 31, 2020
	2020	2019	Net sales	$ 386,000
ASSETS			Cost of goods sold	(212,000)
Current assets			Gross profit	174,000
Cash	$ 66,500	$ 62,000	Operating expenses
Accounts receivable	95,000	113,000	Salaries and wages expense	(66,000)
Merchandise inventory	172,000	165,000	Depreciation expense	(25,000)
Total current assets	333,500	340,000	Other operating expenses	(28,000)
Long-term investments			Income from operations	55,000
Investment in Walking Dead Co.	-	50,000	Other revenues and gains
Property, buildings, and equipment	507,000	304,000	Interest revenue	15,000
Less: Accumulated depreciation	(59,500)	(42,000)	Dividend revenue	9,700
Total assets	$ 781,000	$ 652,000	Gain on disposal of plant assets	12,000
Liabilities and Stockholders' Equity			Other expenses and losses
Current liabilities			Interest expense	(15,000)
Accounts payable	$ 144,000	$ 175,000	Income before income taxes	76,700
Accrued liabilities	17,000	47,000	Income tax expense	(14,000)
Total current assets	161,000	222,000	Net Income	$ 62,700
Long-term Liabilities
Notes payable, long-term	160,000	90,000
Totalliabilities	321,000	312,000
Stockholders' equity
Common stock	370,000	250,000
Retained earnings	140,000	90,000
Treasury stock	(50,000)	-
TotalStockholdersâ Equity	460,000	340,000
Total Liabilities & Stockholders' Equity	$ 781,000	$ 652,000

Additional Information:
A. Sold plant assets with a cost of$75,000 and accumulated depreciation of $7,500,
yielding again of disposal of plant assets of $12,000.
B. Purchased plant assets by payingcash.
C. Issued Notes Payable for Cash.
D. Sold investment in Walking Dead Coat cost (zero gain/loss).
E. Issued Common Stock for Cash.
F. Purchased Treasury Stock for Cash.

Requirements:
Prepare, in good form, a Statement of Cash Flowsusing the indirect method.

beigesardine151

Additional Information:
	A. Sold plant assets with a cost of$75,000 and accumulated depreciation of $7,500,
	yielding again of disposal of plant assets of $12,000.
	B. Purchased plant assets by payingcash.
	C. Issued Notes Payable for Cash.
	D. Sold investment in Walking Dead Coat cost (zero gain/loss).
	E. Issued Common Stock for Cash.
	F. Purchased Treasury Stock for Cash.

	Requirements:
	Prepare, in good form, a Statement of Cash Flowsusing the indirect method.

Statement of Cash Flows
Angela's Cleaning Consortium			Seymour-Johnson, Inc.
Comparative Balance Sheet			Income Statement
December 31, 2020 and 2019			For the Year Ended December 31, 2020
	2020	2019	Net sales	$ 386,000
ASSETS			Cost of goods sold	(212,000)
Current assets			Gross profit	174,000
Cash	$ 66,500	$ 62,000	Operating expenses
Accounts receivable	95,000	113,000	Salaries and wages expense	(66,000)
Merchandise inventory	172,000	165,000	Depreciation expense	(25,000)
Total current assets	333,500	340,000	Other operating expenses	(28,000)
Long-term investments			Income from operations	55,000
Investment in Walking Dead Co.	-	50,000	Other revenues and gains
Property, buildings, and equipment	507,000	304,000	Interest revenue	15,000
Less: Accumulated depreciation	(59,500)	(42,000)	Dividend revenue	9,700
Total assets	$ 781,000	$ 652,000	Gain on disposal of plant assets	12,000
Liabilities and Stockholders' Equity			Other expenses and losses
Current liabilities			Interest expense	(15,000)
Accounts payable	$ 144,000	$ 175,000	Income before income taxes	76,700
Accrued liabilities	17,000	47,000	Income tax expense	(14,000)
Total current assets	161,000	222,000	Net Income	$ 62,700
Long-term Liabilities
Notes payable, long-term	160,000	90,000
Totalliabilities	321,000	312,000
Stockholders' equity
Common stock	370,000	250,000
Retained earnings	140,000	90,000
Treasury stock	(50,000)	-
TotalStockholdersâ Equity	460,000	340,000
Total Liabilities & Stockholders' Equity	$ 781,000	$ 652,000

limebeetle28

I am unsure of what is unclear. The instructions are:

1. Set up a worksheet for the solvency ratios--currentratio and the quick ratio.

2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctorsâstatements: their maximum annual debt service is$22,200.

Practice Exercise 11âII: Solvency Ratios

Refer to Doctors Smith and Brownâs financial statementspresented in the preceding Chapter 10.

Required

1. Set up a worksheet for the solvency ratios. current ratio and the quick ratio.

The requested information is below:

Exhibit 10-1 Westside Clinic Balance Sheet

Assets	December 31, 20x2		December 31, 20x1

Current Assets
Cash and cash equivalents		$190,000		$145,000
Accounts receivable (net)		250,000		300,000
Inventories		25,000		20,000
Prepaid Insurance		5,000		3,000
Total Current Assets		$470,000		$468,000
Property, Plant, and Equipment
Land	$100,000		$100,000
Buildings (net)	0		0
Equipment (net)	260,000		300,000
Net Property, Plant, and Equipment		360,000		400,000
Other Assets
Investments	$133,000		$32,000
Total Other Assets		133,000		32,000
Total Assets		$963,000		$900,000
Liabilities and Fund Balance
Current Liabilities
Current maturities of long-term debt	$52,000		$48,000
Accounts payable and accruedexpenses	293,000		302,000
Total Current Liabilities		$345,000		$350,000
Long-Term Debt	$252,000		$300,000
Less Current Maturities of Long-Term Debt	?52,000		?48,000
Net Long-Term Debt		200,000		252,000
Total Liabilities		$545,000		$602,000
Fund Balances
Unrestricted fund balance	$418,000		$298,000
Restricted fund balance	0		0
Total Fund Balances		418,000		298,000
Total Liabilities		$963,000		$900,000

Exhibit 10-2 sets out the result of operations for two years,with the most current period in the left column. If the balancesheet is a snapshot, then the statement of revenue and expenses isa diary because it is a record of transactions over the period of ayear. Operating revenues and operating expenses are set out first,with the result being income from operations of $115,000($2,000,000 less $1,885,000). Then other transactions are reported;in this case, interest income of $5,000 under the headingâNonoperating Gains (Losses).â The total of $120,000 ($115,000 plus$5,000) is reported as an increase in fund balance. This figurecarries forward to the next major report, known as the statement ofchanges in fund balance.

STATEMENT OF CHANGES IN FUND BALANCE/NET WORTH

Remember that our formula for a basic statement of revenue andexpense looked like this:

Operating Revenue â Operating Expenses = Operating Income

Exhibit 10-2 Westside Clinic Statement of Revenue andExpenses

	For the Year Ending

Revenue	December 31, 20x2		December 31, 20x1

Net patient service revenue		$2,000,000		$1,850,000
Total operating revenue		$2,000,000		$1,850,000
Operating Expenses
Medical/surgical services	$600,000		$575,000
Therapy services	860,000		806,000
Other professional services	80,000		75,000
Support services	220,000		220,000
General services	65,000		60,000
Depreciation	40,000		40,000
Interest	20,000		24,000
Total operating expenses		1,885,000		1,800,000
Income from Operations		$115,000		$50,000
Nonoperating Gains (Losses)
Interest Income	$5,000		$2,000
Net nonoperating gains		5,000		2,000
Revenue and Gains in Excess of
Expenses and Losses		$120,000		$52,000
Increase in Unrestricted Fund Balance		$120,000		$52,000

The excess of revenue over expenses flows back into equity orfund balance through the mechanism of the statement of fundbalance/net worth. Exhibit 10-3 shows a balance at the first of theyear; then it adds the excess of revenue over expenses (in theamount of $115,000) plus some interest income (in the amount of$5,000) to arrive at the balance at the end of the year.

If you refer back to the balance sheet, you will see the$418,000 balance at the end of the year appearing on it. So we canthink of the balance sheet, the statement of revenue and expenses,and the statement of changes in fund balance/net worth as lockedtogether, with the statement of changes in fund balance being themechanism that links the other two statements.

But there is one more major reportâthe statement of cashflowsâand we will examine it next.

STATEMENT OF CASH FLOWS

To perceive why a statement of cash flows is necessary, we mustfirst revisit the concept of accrual basis accounting. If cash isnot paid or received when revenues and expenses are entered on thebooksâthe usual situation in accrual accountingâwhat happens? Theother side of the entry for revenues is accounts receivable, andthe other side of the entry for expenses is accounts payable. Theseaccounts rest on the balance sheet and have not yet been turnedinto cash. Another characteristic of accrual accounting is therecognition of depreciation. A capital assetâa piece of equipment,for exampleâis purchased for $20,000. It has a usable life of fiveyears. So depreciation expense is recognized in each of the fiveyears until the $20,000 is used up, or depreciated. (Land is anexception to this rule: it is never depreciated.) Depreciation isrecognized within each year as an expense, but it does notrepresent a cash expense. This is a concept that now enters intothe statement of cash flows.

Exhibit 10-4 presents the current period cash flow. In effect,this statement takes the accrual basis statements and converts themto a cash flow for the period through a series of reconcilingadjustments that account for the noncash amounts.

Understanding the cash/noncash concept makes sense of thisstatement. The starting point is the income from operations, thesubtotal from the statement of revenue and expense. Depreciationand interest are added back, and changes in asset and liabilityac-counts, both positive and negative, are recognized. Theseadjustments account for operating activities. Next, capital andrelated financing activities are addressed; then investingactivities are adjusted. The result is a net increase in cash andcash equivalents of $45,000 in our example. This figure is added tothe cash balance at the beginning of the year ($145,000) to arriveat the cash balance at the end of the year ($190,000). Now referback to the balance sheet, and you will find the cash balance isindeed $190,000. So the fourth major reportâthe statement of cashflowsâinterlocks with the other three major reports.

Exhibit 10-3 Westside Clinic Statement of Changes in FundBalance

	For the Year Ending

Statement of Changes in Fund Balance	December 31, 20x2	December 31, 20x1

Balance First of Year	$298,000	$246,000
Revenue in Excess of Expenses	115,000	50,000
Interest Income	5,000	2,000
Balance End of Year	$418,000	$298,000

Exhibit 10-4 Westside Clinic Statement of Cash Flows

Statement of Cash Flows	For the Year Ending

	December 31, 20x2		December 31, 20x1

Operating Activities
Income from operations		$115,000		$50,000
Adjustments to reconcile income from
operations to net cash flows from
operating activities
Depreciation and amortization		40,000		40,000
Interest expense		20,000		24,000
Changes in asset and liabilityaccounts
Patient accountsreceivable		50,000		â250,000
Inventories		â5,000		â5,000
Prepaid expenses andother assets		â2,000		â1,000
Accounts payable andaccrued expenses		â9,000		185,000
Net cash flow from operating activities		$209,000		$43,000
Cash Flows from Noncapital Financing Activities		0		0
Cash Flows from Capital and Related Financing ActivitiesAcquisition of equipment	$ 0		$(300,000)
Proceeds from loan for equipment	0		300,000
Interest paid on long-term obligations	â20,000		0
Repayment of long-term obligations	â48,000		0
Net cash flows from capital and related financing activities		â68,000		0
Cash Flows from Investing Activities
Interest income received	$5,000		$2,000
Investments purchased (net)	â 101,000		0
Net cash flows from investing activities		â96,000		2,000
Net Increase (Decrease) in Cash and Cash Equivalents		$45,000		$45,000
Cash and Cash Equivalents, Beginning of Year		145,000		100,000
Cash and Cash Equivalents, End of Year		$190,000		$145,000

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ACCT 1209 Chapter Notes - Chapter 3: Income Statement, Net Income, Accrual

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