HM_Week4_TADiscussion

Page 1: Course and Instructor Details

• Course: Econ 4 Financial Accounting

• Instructor: Harrison Mitchell

• Contact: hamitchell@ucsd.edu

• Location: UCSD Economics Department

• Week: 4 WI 25

Page 2: Instructor Information

• Harrison Mitchell (4th year Econ PhD student)

• Office hour: See Schedule

• Email: hamitchell@ucsd.edu

Page 3: Agenda for Today

• Lecture Recap

  • Accrual vs. Cash Basis

  • Revenue Recognition

• Practice Problems

• Relic Spotter Case

Page 4: Lecture Recap

• Overview and key topics covered in the lecture.

Page 5: Accrual vs. Cash Basis

• Key Difference:

  • Timing of revenue and expense recognition.

• Cash Basis:

  • Revenue and expenses recorded when cash is received/paid.

• Accrual Basis:

  • Revenue recognized when earned, and expenses recognized when incurred.

• Key Takeaways:

  • Cash basis is simpler, but accrual gives a clearer financial picture.

  • Accrual is widely used, especially in public companies.

Page 6: Revenue Recognition

• Revenues are recognized under GAAP when:

  • Earned: Goods or services provided.

  • Realized: Payment received either in cash or equivalent cash amount.

• SEC criteria: Recognition is not strictly upon cash receipt.

Page 7: Accounting Conservatism

• Principle requiring caution and verification in accounts preparation.

• Recognize all probable losses but only register gains when fully realized.

• If two solutions are available, choose the one yielding inferior numbers.

Page 8: Expense Recognition

• (1) Matching Principle:

  • For expenses tied to revenue (e.g., production cost): Recognize when associated revenue is recognized.

• (2) Recognition as expenses incur:

  • For expenses not directly tied to production (e.g., utilities, legal fees): Recognize when used/incurred.

Page 9: The Accounting Cycle

• Phases:

  • Analyze transactions

  • Journalize and Post entries

  • Adjusting Entries

  • Prepare Adjusted Trial Balance

  • Prepare Financial Statements

  • Closing Entries

Page 10: Practice Problems

• Section for practice questions following the lecture.

Page 11: Practice Question 1

• The idea behind accrual accounting is that timing of revenue and expense recognition should:

  • a. Match cash inflows and outflows

  • b. Best represent operational activities

  • c. Make descriptions easy to interpret

  • d. None of the above

Page 12: Repeat of Question 1

• Identical to Page 11.

Page 13: Practice Question 2

• Using cash basis means:

  • a. Revenues equal cash outflows

  • b. Expenses equal cash inflows

  • c. Revenues don’t equal cash inflows

  • d. Expenses equal cash outflows

Page 14: Repeat of Question 2

• Identical to Page 13.

Page 15: Practice Question 3

• If Bob receives a cash advance payment of $900 for future delivery of $1500 worth of goods:

  • a. Realized $1500 in revenue

  • b. Recognized $900 in revenue

  • c. Earned $900 in revenue

  • d. None of the above

    • Note: Bob has realized the $900 but has not earned it yet.

Page 16: Repeat of Question 3

• Identical to Page 15 with the same explanation regarding revenue realization.

Page 17: Practice Question 4

• We can update retained earnings when we know:

  • a. Revenues earned

  • b. Expenses incurred

  • c. Dividends paid

  • d. All of the above

• Update formula: ΔRetained Earnings = Net Income - Dividends

  • Note: Net Income = Revenues - Expenses

Page 18: Repeat of Question 4

• Identical to Page 17.

Page 19: Practice Question 5

• John receives $3000 in prepayments for future delivery. The cash prepayment is:

  • a. Recognizable revenue

  • b. Realized revenue

  • c. Earned revenue

  • d. All of the above

Page 20: Repeat of Question 5

• Identical to Page 19

Page 21: Practice Question 6

• Delivery of goods without securing cash results in revenues that are:

  • a. Earned

  • b. Realized

  • c. Recognized

  • d. None of the above

Page 22: Repeat of Question 6

• Identical to Page 21

Page 23: Practice Question 7

• Recognized asset situations, except:

  • a. Delivery contract with Company C

  • b. Inventory sold with payment promise

  • c. Raw materials purchased with a discount

  • d. Prepaid rent for occupied space

Page 24: Repeat of Question 7

• Identical to Page 23

Page 25: Practice Question 8

• Expense recognition in December will occur for:

  • a. Cash dividends paid

  • b. Jets construction costs

  • c. Advance paid for legal services

  • d. None recognized in December

Page 26: Repeat of Question 8

• Identical to Page 25

Page 27: Practice Question 9

• In which scenario is revenue NOT recognized today?

  • a. Product delivered and paid in cash

  • b. Invoice sent for a recent delivery

  • c. Customer pays in advance for future delivery

  • d. None, since all result in recognized revenues.

Page 28: Repeat of Question 9

• Identical to Page 27

Page 29: Relic Spotter Case Study

• Overview of case study activities related to revenue/expense recognition.

Page 30: Relic Spotter Case - Background

• Founder: Rebecca Park

• Investor: Jay Girard

• Shareholders: Park and Girard

• Main business:

  • Rental of portable metal detectors

  • Sale of sundries (e.g., water, energy bars)

• Note: Owners ≠ Business; revenues tied to main activities

Page 31: Case Activities

• Understanding revenue and expense recognition principles through case activities.

Page 32: Relic Spotter Case – Activities

• (3) On April 2, Park hired a lawyer at a cost of $3,900 for incorporation.

Page 33: Relic Spotter Case – Activities

• (3) Legal fees entry:

  • Date: 4/2/2012

  • Accounts: Dr. Legal Fee Expense (+E, -SE)

  • Cr. Cash (-A)

  • Expense recognized when revenue is recognized or expense is incurred (matching principle).

Page 34: Relic Spotter Case – Activities

• (5) On April 7, renovation work costing $33,000 ordered to extend building life.

  • Date: 5/25/2012

Page 35: Relic Spotter Case – Activities

• Renovation costs entry:

  • Accounts: Dr. Building (+A)

  • Cr. Cash (-A)

  • Record when the work is done.

Page 36: Relic Spotter Case – Activities

• (7) On June 15, ordered $2,000 of sundries inventory "on account" for delivery on June 30.

Page 37: Relic Spotter Case – Activities

• Entry for inventory:

  • Date: 6/30/2012

  • Accounts: Dr. Inventory (+A)

  • Cr. Accounts Payable (+L)

  • Note: Record transaction when goods are delivered.

Page 38: Relic Spotter Case – Activities

• (11) On June 30, hired two employees with salaries of $32,000/year.

Page 39: Relic Spotter Case – Activities

• No entry for hiring employees on 6/30/2012 as no work is performed yet.

Page 40: Conclusion

• Acknowledgment and thanks to participants.