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Libby Chap 3

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Libby Chap 3 Libby Chap 3 Presentation Transcript

  • Chapter 3 – The Income Statement & Operating Activities • Read p 105- 129 • The operating cycle • The revenue recognition & matching principles in relation to the measurement of operating activities • The expanded transaction analysis model • The relationship between income statement and the statement of retained earnings • Total Asset Turnover ratio
  • 3-4 The Operating Cycle Begin Purchase or Purchase manufacture manufacture products or products supplies on credit. Receive payment Receive payment Pay Pay from customers. from suppliers. Deliver product or provide service or provide to customers on credit.
  • 3-8 Elements on the Income Statement Revenues Revenues Increases in assets or settlement of Increases in assets or settlement of liabilities from ongoing operations. liabilities from ongoing operations. Expenses Expenses Decreases in assets or increases in Decreases in assets or increases in liabilities from ongoing operations. liabilities from ongoing operations. Gains Gains Increases in assets or settlement of Increases in assets or settlement of liabilities from peripheral transactions. liabilities from peripheral transactions. Losses Losses Decreases in assets or increases in Decreases in assets or increases in liabilities from peripheral transactions. liabilities from peripheral transactions.
  • 3-9 Papa John's International, Inc. and Subsidiaries Papa John’s Primary Papa John’s Primary Consolidated Statement of Income Operating Activity is Operating Activity is For the Month Ended January 31, 2004 selling pizza and selling selling pizza and selling (In thousands) franchises. franchises. Revenues Restaurant and commissary sales $ 66,000 Franchise royalties and development fees 2,800 Total revenues 68,800 Costs and expenses Operating Activities Cost of sales 30,000 Salaries and benefits expense 14,000 General and administrative expenses 7,000 Total costs and expenses 51,000 Operating income 17,800 Other revenues and gains (expense and losses) Investment income 1,000 Interest expense - Peripheral Activities Gain on sale of land 3,000 Income before income taxes 21,800 Income tax expense - Net income $ 21,800 Earnings per share $ 1.21
  • 3-11 Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income For the Month Ended January 31, 2004 (In thousands) Revenues Restaurant sales $ 66,000 Franchise royalties and development fees 2,800 Total revenues 68,800 Costs and expenses Cost of sales 30,000 Salaries and benefits expense 14,000 General and administrative expenses 7,000 Total costs and expenses 51,000 Operating income 17,800 Other revenues and gains (expense and losses) Investment income 1,000 Interest expense - Earnings Per Share Earnings Per Share Gain on sale of land 3,000 Income before income taxes 21,800 Net Income Income tax expense - Weighted Average Net income $ 21,800 Number of Common Earnings per share $ 1.21 Shares Outstanding
  • 3-14 Cash Basis Accounting Revenue is recorded Expenses are recorded when cash is received. when cash is paid.
  • 3-15 Accrual Accounting 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 - Generally Acceptable Accounting Principles
  • 3-16 Revenue Principle Recognize revenues when . . .  Delivery has occurred or services have been rendered.  There is persuasive evidence of an arrangement for customer payment.  The price is fixed or determinable.  Collection is reasonably assured.
  • 3-17 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
  • 3-18 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 Company Received Delivers Cash (+A) xxx Unearned revenue (+L) xxx Revenue will be recorded when earned.
  • 3-19 Revenue Principle Typical liabilities that become revenue when earned include . . . CASH COLLECTED REVENUE (Goods or services due to over time will (Earned when goods customers) become or services provided) Rent collected in advance Rent revenue Unearned air traffic revenue Air traffic revenue Deferred subscription revenue Subscription revenue
  • 3-20 Revenue Principle When cash is received on the date the revenue is earned, the following entry is made: Company Delivers AND Cash Received Cash (+A) xxx Revenue (+R) xxx
  • 3-21 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 - Company Delivers Accounts receivable (+A) xxx Revenue (+R) xxx
  • 3-22 Revenue Principle When the cash is received the ACCOUNTS RECEIVABLE is reduced. Cash received after revenue is earned - Cash Company Received Delivers Accounts receivable (+A) xxx Revenue (+R) xxx Cash will be collected.
  • 3-24 The Matching Principle Resources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid. paid.
  • 3-25 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
  • 3-26 The Matching Principle When the expense is incurred PREPAID EXPENSE is reduced and an EXPENSE is recorded. Cash is paid before expense is incurred - $ Expense Paid Incurred Prepaid expense (+A) xxx Cash (-A) xxx Expense will be recorded when incurred.
  • 3-27 The Matching Principle When cash is paid on the date the expense is incurred, the following entry is made: Expense Incurred AND Cash Paid Expense (+E) xxx Cash (-A) xxx
  • 3-28 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 Incurred Expense (+E) xxx Payable (+L) xxx
  • 3-29 The Matching Principle When cash is paid the PAYABLE is reduced. Cash paid after expense is incurred - Cash Expense Paid Incurred Expense (+E) xxx Payable (+L) xxx Cash will be paid.
  • 3-30 The Matching Principle Typical assets and their related expense accounts include. . . as used over CASH PAID FOR time becomes EXPENSE Supplies inventory Supplies expense Prepaid insurance Insurance expense Buildings and equipment Depreciation expense
  • 3-32 Expanded Transaction Analysis Model Let’s look at an expanded transaction analysis model that includes the recording of revenues and expenses.
  • 3-33 A = L + SE ASSETS LIABILITIES Debit Credit Debit Credit for for for for Increase Decrease Decrease Increase Next, let’s see CONTRIBUTED RETAINED how Revenues CAPITAL EARNINGS and Expenses Debit Credit Debit Credit affect Retained for for for for Decrease Increase Decrease Increase Earnings.
  • 3-34 Expanded Transaction Analysis Model RETAINED EARNINGS Dividends decrease Net Income increases Retained Earnings. Retained Earnings. Debit Credit for for Decrease Increase REVENUES EXPENSES Debit Credit Debit Credit for for for for Decrease Increase Increase Decrease
  • 3-36 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) (asset). 2. Franchise fee revenue (revenue) (revenue). 3. Unearned franchise fees (liability). (liability) Determine the Direction of the Effect 1. Cash increases. 2. Franchise fee revenue increases. 3. Unearned franchise fees increases.
  • 3-37 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. Assets = Liabilities + Stockholders' Equity Cash 400 Unearned franchise 300 Franchise fees 100 revenue revenue General Journal Description Debit Credit Cash 400 Unearned franchise revenue 300 Franchise fees revenue 100
  • 3-38 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) (asset). 2. Restaurant sales revenue (revenue). (revenue) 3. Cost of sales- restaurant (expense). (expense) 4. Inventories (asset) (asset). Determine the Direction of the Effect 1. Cash increases. 2. Restaurant sales revenue increases. 3. Cost of sales- restaurant increases. 4. Inventories decrease.
  • 3-39 The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Assets = Liabilities + Stockholders' Equity Cash 36,000 Restaurant sales 36,000 revenue Inventory (9,600) Cost of sales (9,600) General Journal Description De bit Cre dit Cash 36,000 Re sta ura nt sa le s re venue 36,000 Cost of sa le s - re sta urant 9,600 Inve ntorie s 9,600
  • 3-41 How are Financial Statements Prepared? Income Revenues – Expenses = Net Income Statement Beginning Retained Earnings Statement of + Net Income Retained - Dividends Declared Earnings Ending Retained Earnings Balance Assets = Liabilities + Stockholders’ Equity Sheet Contributed Capital Retained Earnings Change = Cash from Operating Activities Statement in + Cash from Investing Activities of Cash Flows Cash + Cash from Financing Activities
  • 3-45 Focus on Cash Flows Effect on Nature of Operating Activity Cash Flows Cash received from: Customers + Investments + Cash paid to: Suppliers - Employees - Interest paid - Income taxes paid - Cash Outflows Cash Inflows
  • 3-48 Key Ratio Analysis Asset Sales (or Operating) Revenues Turnover = Average Total Assets Ratio Creditors and analysts use Measures the sales this ratio to assess a generated per dollar company’s effectiveness at of assets. controlling current and noncurrent assets.
  • Answers to End of Chapter MC Qs 1. b) 2. c) 3. d) 4. a) 5. b) 6. d) 7. c) 8. a) 9. c) 10. c)
  • Chap 3 Homework • E 3-1 • E 3-2 • E 3-6 • P 3-1 • P 3-3