Chapter 3 Flashcards
What is the basic income statement?
revenues - expenses = net income
What is a revenue and when is it recognized?
increase in net assets form providing goods and services
when each performance obligation is satisfied
What is an expense and when is it recognized?
decrease in net assets in order to produce revenue
when the expense is incurred or used up
What is cash-basis accounting?
when cash flows in or out
When are revenues and expenses recognized under the cash basis?
when the cash is received, and the expense is paid
What is accural-basis accounting?
reports when the service is actually complete (regardless when the cash is received or not)
When are revenues and expenses recognized under the accrual basis?
When the transaction occurs
What is a performance obligation?
the service a company needs to complete in order to get money
As an example: when are costco’s performance obligations when selling goods? When would revenue be recognized?
to have the good in stock and sell them to me
when you walk out of the store
As an example: what are costco’s performance obligations when selling an annual membership? When would revenue be recognized?
to stay open and provide goods
At the end of the year (or another period)
Why aren’t dividends recognized as expenses?
a dividend does not play into the day-to-day operation of a company
What are the normal balances of revenue and expenses?
Revenue: Credit
Expenses: Debit
How does the normal balance of revenues relate to retained earnings?
as revenues cause an increase in net income which then increases retained earnings
(retained earning’s normal balance is credit)
How does the normal balance of expenses relate to retained earnings?
cause a decrease in net income which then decreases retained earnings
(debits decrease retained earning’s)
Why are revenues and expenses temporary accounts?
they are accounts that close at the end of accounting periods
