Chapter 3 — The Income Statement &
Operating Activities

Read p 105- 129

The operating cycle

The revenue recognition & m...
lThe Operating Cycle

Pay
suppliers. 

Begin
Purchase or
manufacture
products or

supplies on
credit. 

Deliver product
or...
Elements on the Income Statement

Revenues
Increases in assets or settlement of
liabilities from ongoing operations. 

   ...
Papa John's Primary
Operating Activity is

selling pizza and selling

franchises. 

Operating Activities vf

Peripheral Ac...
it-girrnrgige var -tlliaira: 

Net Income

Weighted Average
Number of Common

Shares Outstanding

3-11

Papa John'sInterna...
3-14

lCash Basis Accounting

Revenue is recorded Expenses are recorded
when cash is received.  when cash is paid.
Assets,  liabilities,  revenues,  and expenses
should be recognized when the transaction
that causes them occurs,  not nec...
Revenue Principle

Recognize revenues when .  . . 

0 Delivery has occurred or services have
been rendered. 

eThere is pe...
3-17

‘Revenue Principle

If cash is received before the company

delivers goods or services,  the liability
account is re...
3-18

‘Revenue Principle

When the company delivers the goods or

services is reduced
and is recorded. 

 

Cash received ...
3-19

Revenue Principle

Typical liabilities that become
revenue when earned include .  . . 

CASH COLLECTED REVENUE
(Good...
3-20

‘Revenue Principle

When cash is received on the date

the revenue is earned,  the
following entry is made: 

 

Com...
3-21

‘Revenue Principle

If cash is received after the company

delivers goods or services,  an asset
is recorded. 

 

C...
3-22

Revenue Principle

W‘r. i=_r. ri titre lzsisti 1; receives. » litre r‘i_C’C'~fJUi'~i'i'3’

SJ F: r"F. ’

.2‘
r ; _,E...
3-24

The Matching Principle

Resources
consumed to earn
revenues in an
accounting period

should be recorded
in that peri...
3-25

‘The Matching Principle

If cash is paid before the company receives

goods or services,  an asset account, 
is reco...
3-26

‘The Matching Principle

When the expense is incurred

is reduced and an
recorded. 

 

Cash is paid before expense ...
3-27

‘The Matching Principle

When cash is paid on the date the

expense is incurred,  the following
entry is made: 

 

...
3-28

‘The Matching Principle

If cash is paid after the company receives

goods or services,  a liability is
recorded. 

...
3-29

‘The Matching Principle
When cash is paid the is reduced. 

Cash paid after expense is incurred -

Expense Ca? “
Inc...
3-30

The Matching Principle

Typical assets and their related
expense accounts include.  . . 

as used over
CASH PAID FOR...
3-32

Expanded Transaction Analysis Model

Let's look at an expanded
transaction analysis model that
includes the recordin...
3-33

'A=  L+SE

ASSETS LIABILITIES

Increase Decrease Decrease Increase

 

Next» leis 896‘ CONTRIBUTED RETAINED
how Reve...
Expanded Transaction Analysis I/ iodel

RETAINED
DiVide“de deereeee EARNINGS Net Income increases

 for for

Decrease Incr...
3-36

Papa John’s sold franchises for $400 cash.  The
company earned $100 immediately.  The rest will
be earned over sever...
3-37

Papa John’s sold franchises for $400 cash.  The
company earned $100 immediately.  The rest will
be earned over sever...
3-38

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

Deter...
3-39

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

Liabil...
3-41

‘How are Financial Statements Prepared? 

Income

statement {Revenues — Expenses =  Net Income

Beginning Retained E...
3-45

Focus on Cash Flows

Effect on
Nature of Operating Activity Cash Flows

Cash received from

Cash paid to:  Suppliers...
3-48

Key Ratio Analysis

A559‘ Sales (or Operating) Revenues
Tumover =   

Ratio Average Total Assets

Measures the Sa| e...
". ‘9.°°. “.5’. °‘.4>*. °°. '°. -‘

Answers to End of Chapter MC Qs

O
gomoqdmaod
Q/ gy%/ g/%/ g/&—/ g
Chap 3 Homework

E 3-1
E 3-2
E 3-6
P 3-1
P 3-3
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Libby Chap 3

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Libby Chap 3

  1. 1. 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
  2. 2. lThe Operating Cycle Pay suppliers. Begin Purchase or manufacture products or supplies on credit. Deliver product or provide service to customers on credit. Receive payment from customers. 3-4
  3. 3. Elements on the Income Statement Revenues Increases in assets or settlement of liabilities from ongoing operations. Expenses Decreases in assets or increases in liabilities from ongoing operations. Gains Increases in assets or settlement of ‘ liabilities from peripheral transactions. Losses Decreases in assets or increases in liabilities from peripheral transactions.
  4. 4. Papa John's Primary Operating Activity is selling pizza and selling franchises. Operating Activities vf Peripheral Activities Papa John'sInternationaI, Inc. and Subsidiaries 3-9 Consolidated Statement of Income I 1 For the Month Ended January 31. 2004 (In thousands) Revenues Restaurant and oommissary sales Franchise royalties and development fees Total revenues Costs and expenses Cost of sales Salaries and benefits expense General and administrative expenses Total costs and expenses Operating income Other revenues and gains (expense and Iowes) Investment Income Interest expense Gain on sale ofland Income before income taxes Income tax expense Net income $ 66,000 2.800 51.000 17,800 1,0lII 3,000 amings pershare
  5. 5. it-girrnrgige var -tlliaira: Net Income Weighted Average Number of Common Shares Outstanding 3-11 Papa John'sInternational, Inc. and Subsidiaries Consolidated Statement of Income For he Month Ended January 31, ZIII4 (In thousands) Revenues Restaurant sales $ 66,00) Franchia royalties and development fees 2,8lX) Total revenues 68,860 costs and expenses Cost of sales 30,0lD Salaries and benefits expense 14,00) General and administrative expenses 7.000 Total costs and expenses 51,000 Operating income 17.8w Other revenues and gains (expense and Iosss) Investment income 1,000 Interest expense - Gain on sale of land 3,000 Income before income taxes 21.80) Income tax expense - Net income S 21,80) Earnings per share $ 1.21
  6. 6. 3-14 lCash Basis Accounting Revenue is recorded Expenses are recorded when cash is received. when cash is paid.
  7. 7. 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
  8. 8. Revenue Principle Recognize revenues when . . . 0 Delivery has occurred or services have been rendered. eThere is persuasive evidence of an arrangement for customer payment. eThe price is fixed or determinable. 0 Collection is reasonably assured. 346
  9. 9. 3-17 ‘Revenue Principle If cash is received before the company delivers goods or services, the liability account is recorded. Cash received before revenue is earned - Cash Received Cash (+A) xxx Unearned revenue (+L)
  10. 10. 3-18 ‘Revenue Principle When the company delivers the goods or services is reduced and is recorded. Cash received before revenue is earned - Cash Company Received Delivers Cash (+A) xxx Unearned revenue (+L) Revenue will be recorded when earned.
  11. 11. 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) be come or services provided) Rent collected in advance Rent revenue ‘/ Unearned air traffic revenue » Air traffic revenue Deferred subscription revenue my Subscription revenue
  12. 12. 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)
  13. 13. 3-21 ‘Revenue Principle If cash is received after the company delivers goods or services, an asset is recorded. Cash received after revenue is earned - Company Delivers Accounts receivable (+A) xxx Revenue (+R)
  14. 14. 3-22 Revenue Principle W‘r. i=_r. ri titre lzsisti 1; receives. » litre r‘i_C’C'~fJUi'~i'i'3’ SJ F: r"F. ’ .2‘ r ; _,E; '”'y’,1l£fiLE-’ is-: ‘l'. -i~, :‘= ic'l. JM Cash received after revenue is earned - Company Ca? “ Dem/ erg Received Accounts receivable (+A) xxx Revenue (+R) xxx Cash will be collected. J "
  15. 15. 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.
  16. 16. 3-25 ‘The Matching Principle If cash is paid before the company receives goods or services, an asset account, is recorded. Cash is paid before expense is incurred - $ Paid Prepaid expense (+A) xxx Cash (-A) xxx
  17. 17. 3-26 ‘The Matching Principle When the expense is incurred is reduced and an recorded. Cash is paid before expense is incurred - $ Expense Paid Incurred Prepaid expense (+A) Cash (-A) Expense will be recorded when incurred.
  18. 18. 3-27 ‘The Matching Principle When cash is paid on the date the expense is incurred, the following entry is made: Expense Incurred Ann) Cash Paul Expense(+E) Cash(-A) xxx
  19. 19. 3-28 ‘The Matching Principle If cash is paid after the company receives goods or services, a liability is recorded. Cash paid after expense is incurred - Expense Incurred Expense (+E) xxx Payable (+L) xxx
  20. 20. 3-29 ‘The Matching Principle When cash is paid the is reduced. Cash paid after expense is incurred - Expense Ca? “ Incurred Pi’-“d Expense (+E) xxx Payable (+L) Cash will be paid.
  21. 21. 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
  22. 22. 3-32 Expanded Transaction Analysis Model Let's look at an expanded transaction analysis model that includes the recording of revenues and expenses.
  23. 23. 3-33 'A= L+SE ASSETS LIABILITIES Increase Decrease Decrease Increase Next» leis 896‘ CONTRIBUTED RETAINED how Revenues CAPITAL EARNINGS arid EXPGIISGS Debit Credit Debit Credit affect Retained for for for for Earnings. Decrease Increase Decrease Increase
  24. 24. Expanded Transaction Analysis I/ iodel RETAINED DiVide“de deereeee EARNINGS Net Income increases for for Decrease Increase” Vii ( I/ : REVENUES EXPENSES Debit Credit Debit Credit for for for for Increase Decrease Decrease Increase 3-34
  25. 25. 3-36 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. Determine the Direction of the Effect . Cash increases. . Franchise fee revenue increases. . Unearned franchise fees increases.
  26. 26. 3-37 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. = + Stockholders’ Equity Cash 400 Unearned franchise 300 Franchise fees 100 revenue revenue General Journal Unearned franchise revenue Franchise fees revenue E: -E. XIII!
  27. 27. 3-38 The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Determine the Direction of the Effect . Cash increases. . Restaurant sales revenue increases. . Cost of sales- restaurant increases. . Inventories decrease.
  28. 28. 3-39 The company sold $36,000 ofpizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Liabilities Stockholders‘ Equity Cash 36,000 Restaurant sales 36,000 revenue Inventory (9,600) Cost of sales (9,600) General Journa Description Cash 36,000 Resta ura nt sales revenue Cost of sales - resta urant Inventories
  29. 29. 3-41 ‘How are Financial Statements Prepared? Income statement {Revenues — Expenses = Net Income Beginning Retained Earnings + Net Income - Dividends Declared Ending Retained Earnings Statement of Retained Earnings Balance { Assets = Liabilities + Stockholders’ Equity ontributed Capital Retained Earnings smtement Change = Cash from Operating Activities in + Cash from Investing Activities Cash + Cash from Financing Activities of Cash Flows
  30. 30. 3-45 Focus on Cash Flows Effect on Nature of Operating Activity Cash Flows Cash received from Cash paid to: Suppliers - Employees Interest paid Income taxes paid
  31. 31. 3-48 Key Ratio Analysis A559‘ Sales (or Operating) Revenues Tumover = Ratio Average Total Assets Measures the Sa| eS Creditors and analysts use this ratio to assess a generated per dollar company's effectiveness at Of assets. controlling current and noncurrent assets.
  32. 32. ". ‘9.°°. “.5’. °‘.4>*. °°. '°. -‘ Answers to End of Chapter MC Qs O gomoqdmaod Q/ gy%/ g/%/ g/&—/ g
  33. 33. Chap 3 Homework E 3-1 E 3-2 E 3-6 P 3-1 P 3-3

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