Chapter 3: Operating Decisions and the Accounting System Flashcards
Operating (Cash-to-Cash) Cycle
The time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers.
Time Period Assumption
The long life of a company can be reported in shorter time periods, such as months, quarters, and years.
2 types of issues arise in reporting periodic income to users:
- Recognition Issues
- Measurement Issues
Recognition Issues
When should the effects of operating activities be recognized (recorded)?
Measurement Issues
What amounts should be recognized?
Revenues
The amounts earned and recorded from a company’s day-to-day business activities, mostly when a company sells products or provides services to customers or clients.
Expenditure
An outlay of cash for any purpose - including to buy equipment, pay off a bank loan, and pay for equipment repair. Not all expenditures are expenses!
Expenses
Costs incurred to generate revenue during the period - most expenses aren’t paid in cash when incurred
Accrual Basis Accounting
Revenues are recognized when goods and services are provided to customers, and expenses are recognized in the same period as the revenues to which they relate, regardless of when cash is received or paid.
Revenue Recognition Principle
Revenues are recognized (1) when the company transfers promised goods or services to customers; (2) in the amount it expects to be entitled to receive.
Expense Recognition Principle (or Matching Principle)
Expenses are recorded in the same time period when incurred to generate revenue.
Revenues increase stockholders equity through Retained Earnings and therefore have
credit balances
Expenses decrease stockholders’ equity through Retained Earnings and therefore have
debit balances
Net Profit Margin Ratio =
(Net Income) / (Net Sales)
In general, net profit margin measures
how much of every sales dollar generated during the period is profit
