Chapter 3: operating decisions and the statement of earnings Flashcards
what is the operating cash to cash cycle?
the time it takes for a company to:
pay cash to its suppliers
provide goods and services
collect cash from customers
what his the periodicity assumption?
means that the long life of a company can be reported in shorter periods
what do the operating expenses mainly consist of?
distribution costs
administrative expenses
other operating expenses
what are the three majors sections of the stamens of earnings?
results of continuing operations
results of discontinued operations
net earnings
earnings per share
what is an expenditure?
an outflow of cash for any purpose
wether it be for bank loan, salaries, equipment
not expense cause it does not generate revenues
what is an expense?
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
what are costs of sales?
the costs of good sold
ex: costs of handling and transport, purchasing price
most significant expense
what do inventories become when they are sold??
they become an expense: costs of sale
gross profit (gross margin)
net sales - costs of sales
what are operating expenses?
expenses other than costs of sales
expenses necessary for the functioning of the organization
earnings from operations
net sales - (costs of sale + operating expenses)
what is the continuing operations section
section in the statement of earnings that represent the results from continuing operations
includes operating activities and non operating activities
what are non operating activities?
anything that isn’t part of operating activities
investment income
financing costs
what is investment income
buying shares or selling them are not main central operations
financing activities
charging interest on a long is not a main operation
borrowing money
what are gains
increases in assets or decreases in liabilities
comes from non operating activities
what are losses
decreases in assets or increases in liabilities
comes from non operating activities
what are earnings before income taxes
revenues minus all expenses except for incomes tax
what are operating activities
operate as your main purpose of the company
what are results of discontinued operations?
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
what are the two formats that continued operations can be presented?
single step format
multi step format
why do you report discontinued operations separately?
because of their non-recurring nature
Not useful in predicting the future earnings of the company
what is cash basis accounting?
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
what is accrual accounting
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
what process are used to know when expenses and revenues are to be recorded under accrual accounting?
revenue recognition principle
matching process
revenue recognition principle
name the five criteria
- Significant risks and rewards have passed on from seller to buyer
- Managerial involvement & effective control (buyer is fully responsible and in control of the product)
- Revenue can be reliably measured.
- Collection is reasonably assured (Revenue guaranteed on credit and debit)
- Costs for the transaction can be reliably measured
what do we use the matching principle for?
to record expenses
what is the matching principle
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
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?
cash is debited
deferred revenue (unearned revenue) is credited
deferred revenue is debited (less liabilities)
fee revenue is credited (increase in SE)
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?
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)
when recording expenses, how do you record when cash is paid before the expenses is incurred?
what about when the expenses is incurred?
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
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)
the liability is debited (so less liabilities)
cash is credited
expenses is debited
liabilities is credited (so increase in liabilities)
