Operating Decisions & the Accounting System

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Financial Accounting and Reporting: Chapter 3

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18 Terms

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Operating Cycle

The time it takes for a company to pay suppliers for goods or services, sell them to customers, and collect cash from those customers.

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Operations

The activity for which the business was established

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Accounting Cycle

The process used by entities to analyze and record transactions, adjust records, prepare financial statements, and prepare records for the next cycle.

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Time Period Assumption

The long life of a company can be reported in shorter time periods

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Cash Basis Accounting

A method that records revenue when cash is received and expenses when cash is paid.

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Accrual Basis Accounting

A method that records revenue when earned and expenses when incurred, regardless of cash transactions.

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Revenue

Increases in assets or decreases in liabilities from ongoing operations of the business

Increase Net Income → Increases Retained Earnings → Increases Stockholders’ Equity → Credit

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Expense

Decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the same period; Match costs with benefits

decrease Net Income  → Decreases Retained Earnings → Decreases Stockholders’ Equity → Debit

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Revenue Recognition Principle

Revenues are recognized when a company transfers promised goods/services to a customer, in the amount expected to receive.

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Expenses Recognition Principle

Expenses are recognized when incurred in the course of generating revenue (ie resources used).

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Trial Balance

A list of all accounts with balances to ensure that debits equal credits, used internally for preparing financial statements.

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Operating Revenues

Results from the sale of goods or the rendering of services as the central focus of the business

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Gains

Results from the disposal of (primarily) assets form more than the reported book value

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Cost of sales/Cost of goods sold

Cost incurred to make products ready for sale

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Operating Expenses

Other costs related to the generation of operating revenue

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Losses

Results from disposal of (primarily) assets form less than the reported book value

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Income Tax Expense

Taxes owed to governments

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Multi-Step Income Statement

An income statement that includes multiple subtotals, such as gross profit and income from operations.