Operating Decisions and the Income Statement Chapter 3 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Group Project 1 Use EDGAR: Read Articles (e-reserves) – link at ACCT website Answer questions.

The Operating Cycle Purchase or manufacture products or supplies on credit. Deliver product or provide service to customers on credit. Paysuppliers.Paysuppliers. Receive payment from customers. Begin

Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received. Required by - G enerally A cceptable A ccounting P rinciples Accrual Accounting

Revenue Principle Recognize revenues when... Delivery has occurred or services have been rendered. Delivery has occurred or services have been rendered. There is persuasive evidence of an arrangement for customer payment. There is persuasive evidence of an arrangement for customer payment. The price is fixed or determinable. The price is fixed or determinable. Collection is reasonably assured. Collection is reasonably assured. Recognize revenues when... Delivery has occurred or services have been rendered. Delivery has occurred or services have been rendered. There is persuasive evidence of an arrangement for customer payment. There is persuasive evidence of an arrangement for customer payment. The price is fixed or determinable. The price is fixed or determinable. Collection is reasonably assured. Collection is reasonably assured.

Revenue Principle If cash is received before the company delivers goods or services, the liability account UNEARNED REVENUE is recorded. Cash received before revenue is earned - Cash Received Cash (+A) xxx Unearned revenue (+L) xxx

Revenue Principle When the company delivers the goods or services UNEARNED REVENUE is reduced and REVENUE is recorded. Cash received before revenue is earned - Cash Received Company Delivers Cash (+A) xxx Unearned revenue (+L) xxx Revenue will be recorded when earned.

Revenue Principle Typical liabilities that become revenue when earned include...

Revenue Principle When cash is received on the date the revenue is earned, the following entry is made: Cash Received Company Delivers Cash (+A) xxx Revenue (+R) xxx AND

Revenue Principle If cash is received after the company delivers goods or services, an asset ACCOUNTS RECEIVABLE is recorded. Cash received after revenue is earned - Accounts receivable (+A) xxx Revenue (+R) xxx Company Delivers

Revenue Principle Cash Received Accounts receivable (+A) xxx Revenue (+R) xxx Cash received after revenue is earned - Company Delivers When the cash is received the ACCOUNTS RECEIVABLE is reduced. Cash will be collected.

Revenue Principle Assets reflecting revenues earned but not yet received in cash include...

The Matching Principle Resources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid.

The Matching Principle If cash is paid before the company receives goods or services, an asset account, PREPAID EXPENSE is recorded. Cash is paid before expense is incurred - $ Paid Prepaid expense (+A) xxx Cash (-A) xxx

The Matching Principle Expense Incurred When the expense is incurred PREPAID EXPENSE is reduced and an EXPENSE is recorded. Cash is paid before expense is incurred - $ Paid Prepaid expense (+A) xxx Cash (-A) xxx Expense will be recorded when incurred.

The Matching Principle When cash is paid on the date the expense is incurred, the following entry is made: Cash Paid Expense Incurred Expense (+E) xxx Cash (-A) xxx AND

The Matching Principle If cash is paid after the company receives goods or services, a liability PAYABLE is recorded. Cash paid after expense is incurred - Expense (+E) xxx Payable (+L) xxx Expense Incurred

The Matching Principle Cash Paid When cash is paid the PAYABLE is reduced. Cash paid after expense is incurred - Expense Incurred Expense (+E) xxx Payable (+L) xxx Cash will be paid.

The Matching Principle Typical assets and their related expense accounts include...

A = L + SE ASSETS Debit for Increase Credit for Decrease LIABILITIES Debit for Decrease Credit for Increase RETAINED EARNINGS Debit for Decrease Credit for Increase CONTRIBUTED CAPITAL Debit for Decrease Credit for Increase Next, let’s see how Revenues and Expenses affect Retained Earnings.

EXPENSES Debit for Increase Credit for Decrease REVENUES Debit for Decrease Credit for Increase RETAINED EARNINGS Debit for Decrease Credit for Increase Expanded Transaction Analysis Model Dividends decrease Retained Earnings. Net Income increases Retained Earnings.

3- 22 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. Identify & Classify the Accounts 1. Cash (asset). 2. Franchise fee revenue (revenue). 3. Unearned franchise fees (liability). Determine the Direction of the Effect 1. Cash increases. 2. Franchise fee revenue increases. 3. Unearned franchise fees increases.

Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months.

The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Identify & Classify the Accounts 1. Cash (asset). 2. Restaurant sales revenue (revenue). 3. Cost of sales- restaurant (expense). 4. Inventories (asset). Determine the Direction of the Effect 1. Cash increases. 2. Restaurant sales revenue increases. 3. Cost of sales- restaurant increases. 4. Inventories decrease.

The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600.

Let’s look at E3-3

A customer orders and receives 10 personal computers from Dell; the customer promises to pay $18,400 within three months. Answer from Dell’s standpoint. What about cost info? Account NameDebitCredit Accounts Receivable$18,400 Sales Revenue$18,400

Fucillo Hyundai, Inc, sells a truck with a list, or sticker, price of $20,050 for $18,050 cash. Account NameDebitCredit Cash$18,050 Sales Revenue$18,050

Bon-Ton Department Store orders 1,000 men’s shirts from Arrow Shirt Company for $15 each for future delivery. The terms require full payment within 30 days of delivery. Answer from Arrow’s standpoint. Account NameDebitCredit No Entry

Arrow Shirt Company completes production of the shirts described in part c and delivers the order (answer from Arrow Shirt Company perspective) Account NameDebitCredit Accounts Receivable$15,000 Sales Revenue$15,000

Arrow receives payment from Bon-Ton for the order described in part c. Answer from the perspective of Arrow Shirt Company. Account NameDebitCredit Cash$15,000 Accounts Receivable$15,000

A customer purchases a ticket from American Airlines for $410 cash to travel the following January. Answer from American Airlines perspective. Account NameDebitCredit Cash$410 Unearned Airfare Revenue$410

General Motors issues $20 million in new common stock Account NameDebitCredit Cash$20,000,000 Contributed Capital$20,000,000

Pen State University receives $18,300,000 cash for 80,000 five-game season football tickets. Account NameDebitCredit Cash$18,300,000 Unearned Football Ticket Revenue$18,300,000

Penn State plays the first football game described in part h. Account NameDebitCredit Unearned Football Ticket Revenue$3,660,000 Football Ticket Revenue$3.660,000

Precision Construction Company signs a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Precision receives a $50,000 deposit as a deposit on the future construction project. Answer from the perspective of Precision. Account NameDebitCredit Cash$50,000 Unearned Construction Revenue$50,000

On September 1, 2012, a bank lends $1,200 to a company; the note principal and $144 annual interest are due in one year (1,200 X 12%). Answer from the Bank’s perspective. NOW: In 1 year (assuming no other transactions are recorded? Account NameDebitCredit Note Receivable$1,200 Cash$1,200

A popular ski magazine company receives a total of $1,980 today from subscribers. The subscriptions begin in the next fiscal year. Answer from the perspective of the magazine company: What do you do with each edition of the magazine that is sent out? Account NameDebitCredit Cash$1,980 Unearned Subscription Revenue$1,980

Sears, a retail store, sells a $100 lamp to a customer who charges the sale on his store credit card. Answer from Sear’s perspective. Account NameDebitCredit Accounts Receivable$100 Sales Revenue$100