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.