Chapter 3: operating decisions and the statement of earnings

Question 1

what is the operating cash to cash cycle?

Answer 1

the time it takes for a company to:

pay cash to its suppliers

provide goods and services

collect cash from customers

Question 2

what his the periodicity assumption?

Answer 2

means that the long life of a company can be reported in shorter periods

Question 3

what do the operating expenses mainly consist of?

Answer 3

distribution costs

administrative expenses

other operating expenses

Question 4

what are the three majors sections of the stamens of earnings?

Answer 4

results of continuing operations

results of discontinued operations

net earnings

earnings per share

Question 5

what is an expenditure?

Answer 5

an outflow of cash for any purpose

wether it be for bank loan, salaries, equipment

not expense cause it does not generate revenues

Question 6

what is an expense?

Answer 6

only results when an asset is used up to generate revenue

when a certain amount is incurred to generate revenue during a period

necessary to generate revenues

Question 7

what are costs of sales?

Answer 7

the costs of good sold

ex: costs of handling and transport, purchasing price

most significant expense

Question 8

what do inventories become when they are sold??

Answer 8

they become an expense: costs of sale

Question 9

gross profit (gross margin)

Answer 9

net sales - costs of sales

Question 10

what are operating expenses?

Answer 10

expenses other than costs of sales

expenses necessary for the functioning of the organization

Question 11

earnings from operations

Answer 11

net sales - (costs of sale + operating expenses)

Question 12

what is the continuing operations section

Answer 12

section in the statement of earnings that represent the results from continuing operations

includes operating activities and non operating activities

Question 13

what are non operating activities?

Answer 13

anything that isn’t part of operating activities

investment income

financing costs

Question 14

what is investment income

Answer 14

buying shares or selling them are not main central operations

Question 15

financing activities

Answer 15

charging interest on a long is not a main operation

borrowing money

Question 16

what are gains

Answer 16

increases in assets or decreases in liabilities

comes from non operating activities

Question 17

what are losses

Answer 17

decreases in assets or increases in liabilities

comes from non operating activities

Question 18

what are earnings before income taxes

Answer 18

revenues minus all expenses except for incomes tax

Question 19

what are operating activities

Answer 19

operate as your main purpose of the company

Question 20

what are results of discontinued operations?

Answer 20

Operations you’re planning to discontinue operations or you already have

You have to put it here

You have to inform investors that a certain stream of income is going to stop

Result from the disposal of a major segment of the business; reported net of the related income tax effect

Question 21

what are the two formats that continued operations can be presented?

Answer 21

single step format

multi step format

Question 22

why do you report discontinued operations separately?

Answer 22

because of their non-recurring nature

Not useful in predicting the future earnings of the company

Question 23

what is cash basis accounting?

Answer 23

records revenue when cash is received and expenses when cash is paid

If didn’t pay salary yet, you wont record expense
No receivables and no payables

Question 24

what is accrual accounting

Answer 24

You record every transaction whether it be on credit or debit

Something has to be exchanged or declared (with dividends)

records revenues when earned and expenses when incurred

Question 25

what process are used to know when expenses and revenues are to be recorded under accrual accounting?

Answer 25

revenue recognition principle

matching process

Question 26

revenue recognition principle

name the five criteria

Answer 26

1. Significant risks and rewards have passed on from seller to buyer
2. Managerial involvement & effective control (buyer is fully responsible and in control of the product)
3. Revenue can be reliably measured.
4. Collection is reasonably assured (Revenue guaranteed on credit and debit)
5. Costs for the transaction can be reliably measured

Question 27

what do we use the matching principle for?

Answer 27

to record expenses

Question 28

what is the matching principle

Answer 28

Resources used to earn revenues in an accounting period should be recorded as expenses

regardless of when cash is paid

requires that expenses be recorded when incurred in earned revenue

matching costs with benefits

Question 29

when recording revenues, what do you record as debit and credit before the service is not provided but you got the cash??

what about once you provided the service at a later date?

Answer 29

cash is debited
     deferred revenue (unearned revenue) is credited 

deferred revenue is debited (less liabilities)
fee revenue is credited (increase in SE)

Question 30

when recording revenues, what do you record as debit and credit before the service is provided but you did not receive the cash??

what about once you received the cash at a later date?

Answer 30

accounts receivable as debit (Increase in assets)
fee revenue as credit (increase in SE)

CASH is debited
Accounts receivable is credited (decrease in this asset but CASH compensates)

Question 31

when recording expenses, how do you record when cash is paid before the expenses is incurred?

what about when the expenses is incurred?

Answer 31

prepaid thing (since its prepaid, its an asset) is debited
      cash is credited

expense of the asset used is debited
the prepaid asset is credited

Question 32

when recording expenses, how do you record when cash is paid after the expenses is incurred?

what about when the expenses is incurred? (so before)

Answer 32

the liability is debited (so less liabilities)
cash is credited

expenses is debited
liabilities is credited (so increase in liabilities)