Learning Objectives Understand the Business – LO1 Describe common operating transactions and select appropriate income statement account titles. Study the accounting methods – LO2 Explain and apply the revenue and matching principles. – LO3 Analyze, record, and summarize the effects of operating transactions, using the accounting equation, journal entries, and T-accounts. – LO4 Prepare an unadjusted trial balance. Evaluate the results – LO5 Describe limitations of the income statement. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

Operating Activities Operating activities are the day-to-day functions involved in running a business, Typical operating cycle activities include: – Buying goods and services from suppliers and employees – Selling goods and services to customers – Collecting and paying out cash LO1 2© McGraw-Hill Ryerson. All rights reserved.

Income Statement The income statement summarizes the financial impact of operating activities undertaken by the company during the accounting period. Operating activities are the primary source of revenues and expenses. The time period assumption divides the long life of a company into shorter periods, such as months, quarter and years LO1 3© McGraw-Hill Ryerson. All rights reserved.

Revenues are the amounts earned by selling goods or services to customers Expenses are the costs of business necessary to earn revenues Net Income is the excess of revenues over expenses Net income indicates the amount by which shareholders’ equity increases (or decreases) as a result of a company’s operations LO1 4© McGraw-Hill Ryerson. All rights reserved.

Income Statement Accounts The heading states the name of the business, the title of the statement, and the accounting period Revenues earned from the sale of pizza to customers in September The difference between total revenues and total expenses is net income All costs or expenses incurred in September to generate revenues LO1 5© McGraw-Hill Ryerson. All rights reserved.

Cash Basis Accounting Reports revenues when cash is received and expenses when cash is paid. Not allowed under GAAP. Accrual Basis Accounting Reports revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments. Required under GAAP. LO1 6© McGraw-Hill Ryerson. All rights reserved.