McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3
Reporting Operating Results on the
Income Statement
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Operating Activities
Operating activities include buying goods and
services from suppliers and employees and
selling goods and services to customers and
then collecting cash from them.
3-3
Income Statement Accounts
3-4
Accrual Basis Accounting
Accrual Basis
Accounting
GAAP
Records revenues when they are
earned and expenses when they are
incurred, regardless of the timing of
cash receipts or payments.
3-5
Revenue Principle—Revenue Recognition
Timing of Reporting Revenue versus Cash Receipts
1
Cash is received in the same period as the goods or services are provided.
2
Cash is Revenues
received in a period
before goods orwhen
services
are provided.
are recognized
they
are
3
3-6
Revenue Principle
earned.
Cash is received in a period after goods or services are provided.
Matching Principle—Expense Recognition
Timing of Reporting Expenses versus Cash Payments
3-7
1
Cash is paid at the same time as the cost is incurred to generate revenue.
2
Cash Record
is paid before
the expense
incurred
to generate
expenses
inisthe
same
period revenue.
as the
3
revenues with which they can be reasonably
Cash is paid after the cost is incurred to generate revenue.
associated.
Matching Principle
The Expanded Accounting Equation
Exhibit 3.7
- credits.
Expenses
• Revenues areRevenues
recorded with
• Expenses are recorded with debits.
3-8
Pizza Aroma’s Accounting Records
(a) Provided services for cash.
In September, Pizza Aroma delivered pizza to customers for $15,000 cash.
1 Analyze
Assets
(a) Cash +$15,000
2
3-9
Liabilities
+
Stockholders' Equity
Pizza
Revenue (+R) + $15,000
Record
(a)
3
=
dr Cash (+A)
cr Pizza Revenue (+R, +SE)
Summarize
15,000
15,000
Pizza Aroma’s Accounting Records
(b) Receive cash for future services.
Pizza Aroma sold three $100 gift cards at the beginning of September.
1 Analyze
Assets
(b) Cash +$300
2
3-10
Liabilities
Unearned
Revenue +$300
+ Stockholders' Equity
Record
(b)
3
=
dr Cash (+A)
cr Unearned Revenue (+L)
Summarize
300
300
Pizza Aroma’s Accounting Records
(c) Provide services on credit.
Pizza Aroma delivers $500 of pizza to a college organization, billing this customer
on account.
1 Analyze
Assets
(c) Accounts
Receivable +$500
2
3-11
Liabilities
+ Stockholders' Equity
Pizza
Revenue (+R) +$500
Record
(c)
3
=
dr Accounts Receivable (+A)
cr Pizza Revenue (+R, +SE)
Summarize
500
500
Pizza Aroma’s Accounting Records
(d) Receive payment on account.
Pizza Aroma received a $300 check from the college organization, as partial
payment of its account balance.
1 Analyze
Assets
=
Liabilities
+ Stockholders' Equity
(d) Cash
+$300
Accounts
Receivable -$300
2
Record
(d)
3
3-12
dr Cash (+A)
cr Accounts Receivable (-A)
Summarize
300
300
Unadjusted Trial Balance
Cash Ledger Account
3-13
Review of Revenues and Expenses
(3) Cash is received
after the company
earns revenue.
(1) Cash is received
before the company
earns revenue.
dr. Cash
cr. Unearned Rev.
$
dr. Cash
Earn Revenue
Earn Revenue
dr. Unearned Rev.
dr. Accounts Rec.
cr. _______ Revenue
cr. ________ Revenue
(2) Cash is received in the
same period the
company earns revenue.
$
Earn Revenue
dr. Cash
cr. ________ Revenue
3-14
cr. Accounts Rec.
$
Review of Revenues and Expenses
(3) Cash is paid after the
expense is incurred.
(1) Cash is paid before
the expense is
incurred.
dr. Accounts Payable
dr. Prepaid Expense
cr. Cash
$
Use-up Benefits
Use-up Benefits
dr. Business Expense
dr. Business Expense
cr. Accounts Payable
cr. Prepaid Expense
(2) Cash is paid in the
same period the
expense is incurred.
$
Use-up Benefits
dr. Business Expense
cr. Cash
3-15
cr. Cash
$
End of Chapter 3