Escolar Documentos
Profissional Documentos
Cultura Documentos
Basic Concepts
Accounting period.
Conservatism.
Realization.
Matching.
Consistency.
Materiality.
Nature of Income
Summarizes results of operations for a period of
time.
Flow report.
Flows are continuous.
Focuses on earnings activities (or operating
activities).
Reports nature and magnitude.
Accounting Period
Net income for life of company:
= Money in - money out.
Accounting period:
Specified arbitrary interval of
time.
Accounting year = fiscal year =
calendar year (if fiscal YE is
12/31).
Natural business year (1/31 for
retailers).
In India FY is from 1st April, 20x1 to
31st March, 20x2.
Terminology Cautions
Read as not necessarily the same as:
Income revenue.
Net income increase in cash.
Retained earnings cash.
Conservatism
prudent reporting based on healthy skepticism builds
confidence in the results....
Preference for understatement rather than overstatement of
assets and earnings (and Owners equity).
If 2 estimates are equally likely, use the one that results
in smaller assets and earnings.
Conservatism More Formally Stated
Recognize revenues when reasonably certain.
Recognize expenses when reasonably possible.
Requires judgment.
Realization
Indicates amount of revenue that should be recognized.
Conservatism concept indicates when revenue should be
recognized.
Recognize as revenue:
Amount that is reasonably certain to be realized.
Realized = cash received.
For each of the following, how much revenue should be
recorded:
The list price of the product sold to a customer is
$100,000. Because of the large quantity, we agreed to
a 15% discount off of list.
We are a retail store that sells for cash and on credit.
We sold $400,000 on credit last month. Based on prior
experience, we expect that we will eventually collect
about 97% of our sales.
We sold $10,000 of old product on credit. The customer
is very weak financially.
Matching
Expenses must match their revenues and
benefits.
When an event affects both revenues and
expenses, the effect should be recognized in the
same accounting period.
First determine revenues for period.
Then expense matching items of cost.
Exercise
Which type of expenditure are each of the
following?
Presidents salary; rent of sales office.
Inventory purchased last year & sold this.
Building purchased several years ago.
Insurance premium paid last year.
Costs of goods purchased or produced this
year but not yet sold.
Equipment purchases.
December salary of president not yet paid.
Interest expense on loan not yet paid.
Dividends
Distribution of earnings to owners, not an
expense.
Cash dividends reduce cash and Retained
earnings by same amount.
Consistency
Once an accounting method is selected use for all subsequent
events of same character.
Can change if there is sound reason to change.
Must be disclosed to users.
Consistency overtime not over different types of transactions.
Materiality
Insignificant events may be disregarded.
Amounts need not be exact as long as inaccuracy
would not affect decisions of users.
Full disclosure of all important info.
Overriding concern: Would knowledge of event
affect decisions of users?
Application of judgment and common sense.
Income Statement
Also called: Profit & Loss statement = P&L
statement = statement of earnings = statement
of operations
Technically subordinate to BS.
-Shows detail of changes to RE.
Many investors consider IS more important than
BS.
Variations in format.