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Financial Accounting and Reporting: Chapter 3
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.
Operations
The activity for which the business was established
Accounting Cycle
The process used by entities to analyze and record transactions, adjust records, prepare financial statements, and prepare records for the next cycle.
Time Period Assumption
The long life of a company can be reported in shorter time periods
Cash Basis Accounting
A method that records revenue when cash is received and expenses when cash is paid.
Accrual Basis Accounting
A method that records revenue when earned and expenses when incurred, regardless of cash transactions.
Revenue
Increases in assets or decreases in liabilities from ongoing operations of the business
Increase Net Income → Increases Retained Earnings → Increases Stockholders’ Equity → Credit
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
Revenue Recognition Principle
Revenues are recognized when a company transfers promised goods/services to a customer, in the amount expected to receive.
Expenses Recognition Principle
Expenses are recognized when incurred in the course of generating revenue (ie resources used).
Trial Balance
A list of all accounts with balances to ensure that debits equal credits, used internally for preparing financial statements.
Operating Revenues
Results from the sale of goods or the rendering of services as the central focus of the business
Gains
Results from the disposal of (primarily) assets form more than the reported book value
Cost of sales/Cost of goods sold
Cost incurred to make products ready for sale
Operating Expenses
Other costs related to the generation of operating revenue
Losses
Results from disposal of (primarily) assets form less than the reported book value
Income Tax Expense
Taxes owed to governments
Multi-Step Income Statement
An income statement that includes multiple subtotals, such as gross profit and income from operations.
