FC_01_2808

REPORTING OF INCOME :REPORTING OF INCOME


INCOME :INCOME Reflects the result of a company for a period of operation Most important factor to the growth of a business in long-run period Who care about income and in what ways?


INCOME STATEMENT :INCOME STATEMENT Lists sources of revenues generated and costs incurred during a period Including the main elements: Revenues Expenses Net Income


FORMATS OF INCOME STATEMENT :FORMATS OF INCOME STATEMENT Condensed income statement Single step income statement Multistep Income statement


Slide 5 :MULTISTEP INCOME STATEMENT


Slide 6 :SINGLE-STEP INCOME STATEMENT


REVENUE :REVENUE Revenue is the price of goods sold and services rendered during a given accounting period Revenues represent actual or expected cash inflows Reflects the increases in assets of an entity or settlements of its liabilities


EXPENSES :EXPENSES Expenses are the cost of the goods and services used up in the process of earning revenue Expenses represent actual or expected cash outflows Expenses incur in form of assets that flow out or are used up or liabilities that are incurred


REALIZATION PRINCIPLE AND REVENUE RECOGNITION :REALIZATION PRINCIPLE AND REVENUE RECOGNITION A business should record revenue at the time services are rendered to customers or goods sold are delivered to customers – revenue is recorded when it is “earned”, without regard as to when the cash is received Two criteria for recognition Revenue must have been earned Level of revenue must be measurable


MATCHING PRINCIPLE AND EXPENSES RECOGNITION :MATCHING PRINCIPLE AND EXPENSES RECOGNITION In measuring net income for a period, revenue should be offset by all the expenses incurred in producing that revenue The question of in what period will this expenditure help to produce revenue?


Slide 11 :A cost that benefits more than one accounting period is recorded as an asset—unexpired cost In the period that benefits from the use of this asset, an entry is made to allocate a portion of the asset’s cost to expense Examples of Prepaid expenses Depreciation


TWO WAYS OF MATCHING COSTS WITH REVENUE :TWO WAYS OF MATCHING COSTS WITH REVENUE Direct association of costs with specific revenue transaction e.g.: Cost of goods sold, Which can be directly traced to the revenue of a specific accounting period Systematic allocation of costs over the “useful life” of the expenditure e.g.: Depreciation of long-lived assets, which contribute to the earning process over a number of accounting periods. These expenditure cannot be associated with a specific revenue transaction


OTHER METHODS OF RECOGNITION :OTHER METHODS OF RECOGNITION Installment method Revenue [then profit] is gradually recognize over an expended time span as the cash is actually collected from customer Percentage of Completion method Revenue [then profit] is recognized in proportion to the work completed on each project


INSTALLMENT METHOD :INSTALLMENT METHOD On Dec. 15, 2009 a shop sells for $400 a television set which cost $280 (70% of sales price). The terms of the sale call for $100 cash down payment with the balance payable in 15 monthly installments of $20 each, beginning on Jan. 1, 2010 (ignore interest charges)


PERCENTAGE OF COMPLETION :PERCENTAGE OF COMPLETION Quick Construction Company enters into a contract with the Govt. to build a bridge at a price of $50M. The bridge will be built over 3 years at an estimated total cost of $40M. Therefore, the estimated profit is $10M. Actual costs incurred in three years as: $6M; $20M; and $14.52M respectively


UNEXPIRED COST AND MATCHING PRINCIPLE :UNEXPIRED COST AND MATCHING PRINCIPLE Assets are acquired to benefit future operations and exist in terms of unexpired costs, which are deferred to use later When being used up these costs are “expired” in order to bring in some benefit–revenue in a certain period Matching principle records these expired costs as expenses to be offset again revenue generated in that period


EXPENDITURES BENEFITING MORE THAN ONE ACCOUNTING PERIOD :EXPENDITURES BENEFITING MORE THAN ONE ACCOUNTING PERIOD Allocate to a number of accounting period or not? The application of objectivity, conservatism and materiality principles


ACCRUAL AND CASH BASIS–THE QUESTION OF TIMING :ACCRUAL AND CASH BASIS–THE QUESTION OF TIMING Revenues Advanced as unearned Paid in the period earned Will be paid in the future as accrued revenue (receivable) Expenses Paid in advance as prepaid Paid in the period incurred Will be paid in the future as accrued liabilities (payable)


GAINS AND LOSSES :GAINS AND LOSSES FASB Statement of Concept No. 6, par 82-83 Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owner Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners


SALES FIGURE AND REVENUES :SALES FIGURE AND REVENUES Revenue = Total sales - [Sales returns and allowances + Sales discounts] Why keep Sales returns and allowances separate?


COST OF GOODS SOLD :COST OF GOODS SOLD Cost of Goods Sold and meanings of Gross Profit Periodic inventory system and calculation of Cost of Goods Sold


PROFIT MARGIN-ONE INDICATOR OF PROFITABILITY :PROFIT MARGIN-ONE INDICATOR OF PROFITABILITY How much income can 1 dollar of net sales make?


ACCOUNTS RECEIVABLE AND BAD DEBTS :ACCOUNTS RECEIVABLE AND BAD DEBTS A/R are subject to potential losses Uncollected amount represents an expense of the enterprise


THE NEED FOR ALLOWANCE FOR DOUBTFUL DEBTS :24 THE NEED FOR ALLOWANCE FOR DOUBTFUL DEBTS Matching principle Actual uncollected amount cannot be known until later periods Entry?


ALLOWANCE FOR DOUBTFUL DEBTS :25 ALLOWANCE FOR DOUBTFUL DEBTS Reflects the amount [out of the current balance of A/R] estimated to be uncollectible A contra-asset account Allowance for Doubtful debts and conservatism


Slide 26 :26 Current assets: Account Receivable.................................... $ 250,000 Less: Allowance for doubtful debts.............. 10,000 240,000 HOME FURNITURE SHOP Partial Balance Sheet January 31, 2009


THE EFFECT OF WRITE-OFF ENTRY :27 THE EFFECT OF WRITE-OFF ENTRY BEFORE THE WRITE-OFF AFTER THE WRITE-OFF


ADJUSTMENTS OF THE DOUBTFUL DEBTS AT THE END OF THE PERIOD :28 ADJUSTMENTS OF THE DOUBTFUL DEBTS AT THE END OF THE PERIOD The adjustment will depend on Estimate of uncollectible accounts and Current balance of allowance for doubtful debts


ESTIMATING UNCOLLECTIBLES“BALANCE SHEET” APPROACH :29 ESTIMATING UNCOLLECTIBLES“BALANCE SHEET” APPROACH The use of “aging” method Classifying each receivable according to its age Based on the logic that: The longer past due an account receivable becomes, the greater the likelihood that it will not be collected


ESTIMATING UNCOLLECTIBLES“INCOME STATEMENT” APPROACH :30 ESTIMATING UNCOLLECTIBLES“INCOME STATEMENT” APPROACH Doubtful debts expense is estimated as some percentage of net credit sales The adjusting entry is made in the full amount of the estimated expense, without regard for the current balance in the allowance for doubtful debts Compare the two approaches?


WRITE-OFF OF BAD DEBTS :31 WRITE-OFF OF BAD DEBTS Accounts and procedures Allowance method Direct write-off method Recovery of an account that was previously written-off


MANAGEMENT AND CONTROL OF ACCOUNTS RECEIVABLE :MANAGEMENT AND CONTROL OF ACCOUNTS RECEIVABLE Credit policies Who should be offered credit? How much? What terms? Monitoring credit policies Age analysis of receivables Calculating and analyzing ratios


MANAGEMENT AND CONTROL OF ACCOUNTS RECEIVABLE :MANAGEMENT AND CONTROL OF ACCOUNTS RECEIVABLE Internal control Adequate safeguards Segregation of duties Disposal of accounts receivable Sale of accounts receivable Realize cash to finance activities Minimize costs of credit control