4-1 ECON 3A- UCSB Income Measurement and Accrual Accounting Income Measurement and Accrual Accounting Chapter 4

4-1 ECON 3A- UCSB

Income Measurement Income Measurement and Accrual Accountingand Accrual Accounting Income Measurement Income Measurement and Accrual Accountingand Accrual Accounting

Chapter

4

Chapter

4

4-2 ECON 3A- UCSB

4-3 ECON 3A- UCSB

A step-back: Typical accountsA step-back: Typical accounts

CURRENT:

Cash

Accounts receivable

Accrued revenue

Inventory

Prepaid expenses

LONG TERM:

Fixed assets

CURRENT:

Cash

Accounts receivable

Accrued revenue

Inventory

Prepaid expenses

LONG TERM:

Fixed assets

CURRENT:

Accounts payable

Accrued expenses

Deferred/ Unearned revenue

Current portion of LT debt

LONG TERM:

LT debt, excluding current portion

CURRENT:

Accounts payable

Accrued expenses

Deferred/ Unearned revenue

Current portion of LT debt

LONG TERM:

LT debt, excluding current portion

Contributed Capital

Retained Earnings

Contributed Capital

Retained Earnings

NET INCOME

Revenue

COGS

Depreciation expense

SG & A expense


Other expenses

Interest expense

NET INCOME

Revenue

COGS


SG & A expense


Other expenses

Interest expense

4-4 ECON 3A- UCSB

A step-back: Contra-assetsA step-back: Contra-assets

CURRENT:

Cash

Accounts receivable

Accrued revenue

Inventory

Prepaid expenses

LONG TERM:

Fixed assets

CURRENT:

Cash

Accounts receivable

Accrued revenue

Inventory

Prepaid expenses

LONG TERM:

Fixed assets

Allowance for doubtful accounts

Accumulated depreciation

4-5 ECON 3A- UCSB

Cash Basis versus Accrual Cash Basis versus Accrual Basis AccountingBasis Accounting

Cash Basis versus Accrual Cash Basis versus Accrual Basis AccountingBasis Accounting

4-6 ECON 3A- UCSB

TERMS- SOME REVISITEDTERMS- SOME REVISITED

RECOGNIZED: Recorded to the ledger.. i.e incorporated into the financial statements

REALIZED: Physical receipt/ giving. Not necessarily “recognized” at the same time as “realized”

HISTORICAL COST: What we paid for something. It is GAAP in almost every instance.

NET BOOK VALUE: What our initial historical cost was net of any depreciation or other adjustments since the date acquired.

MEASUREMENT: Where do the amounts come from? Remember that assets and liabilities are “probable”. Consequently we have to introduce “Estimation” to properly record an asset or liability at its properly measured amount. This is know as “Valuation” of assets and liabilities.

RECOGNIZED: Recorded to the ledger.. i.e incorporated into the financial statements

REALIZED: Physical receipt/ giving. Not necessarily “recognized” at the same time as “realized”

HISTORICAL COST: What we paid for something. It is GAAP in almost every instance.

NET BOOK VALUE: What our initial historical cost was net of any depreciation or other adjustments since the date acquired.

MEASUREMENT: Where do the amounts come from? Remember that assets and liabilities are “probable”. Consequently we have to introduce “Estimation” to properly record an asset or liability at its properly measured amount. This is know as “Valuation” of assets and liabilities.

4-7 ECON 3A- UCSB

The The Income StatementIncome Statement report the revenues and expenses of a firm, for a particular period of time, stated according to the accrual basis of accounting.

The The Income StatementIncome Statement report the revenues and expenses of a firm, for a particular period of time, stated according to the accrual basis of accounting.

Measuring IncomeMeasuring IncomeMeasuring IncomeMeasuring Income

The The objectiveobjective of preparing an income statement is to obtain a of preparing an income statement is to obtain a measure of operating performance that measure of operating performance that matchesmatches a firm’s a firm’s outputs (revenues) with the associated inputs (expenses).outputs (revenues) with the associated inputs (expenses).

The The objectiveobjective of preparing an income statement is to obtain a of preparing an income statement is to obtain a measure of operating performance that measure of operating performance that matchesmatches a firm’s a firm’s outputs (revenues) with the associated inputs (expenses).outputs (revenues) with the associated inputs (expenses).

4-8 ECON 3A- UCSB

Cash Basis versus Accrual Basis of Cash Basis versus Accrual Basis of AccountingAccounting

Cash Basis:Cash Basis:

RevenueRevenue is recorded only when the cash is received and, is recorded only when the cash is received and,

expensesexpenses are recorded only when the cash is paid.are recorded only when the cash is paid.

Accrual Basis:Accrual Basis:

Recognizing Recognizing revenuerevenue when it is earned, without regard to when the when it is earned, without regard to when the cash is received, and cash is received, and

recognizing recognizing expensesexpenses in the period in the period benefitedbenefited, without regard to , without regard to when the cash is paid. when the cash is paid. (MATCHING)(MATCHING)

Statement of Cash Flows- Statement of Cash Flows- Fills in the gap!Fills in the gap!

NOTE:NOTE: They are THE SAME in the long-term. Also the timing of They are THE SAME in the long-term. Also the timing of recording revenues and expenses under GAAP is a primary objective recording revenues and expenses under GAAP is a primary objective of high-level accounting.of high-level accounting.

4-9 ECON 3A- UCSB

Cash Basis versus Accrual Basis ExampleCash Basis versus Accrual Basis Example

Seminis, Inc. had the following transactions: Seminis, Inc. had the following transactions: In September 2000, Seminis purchased seed In September 2000, Seminis purchased seed

inventory for $18,000 on credit. Seminis paid the inventory for $18,000 on credit. Seminis paid the suppliers invoice in suppliers invoice in SeptemberSeptember 2000. 2000.

In October 2000, Seminis sold the seed for $35,000 In October 2000, Seminis sold the seed for $35,000 on credit. on credit.

In November 2000, the customer paid the $35,000 In November 2000, the customer paid the $35,000 due Seminis.due Seminis.

Compute the net income for September, October, and Compute the net income for September, October, and November under cash basis accounting and accrual November under cash basis accounting and accrual basis accounting.basis accounting.

4-10 ECON 3A- UCSB


$ 35,000

$ 35,000

$ (18,000) $ 35,000 $ 17,000

(18,000)

$ 17,000 $ 17,000

$ 35,000

$ 35,000

(18,000)

(18,000)

(18,000)

Sept. Oct. Nov. Total

Sept. Oct. Nov. Total

Cash Basis Accounting

Revenues

Expenses

Net income (loss)

Accrual Basis Accounting

Revenues

Expenses

Net income (loss)

Seminis Inc.

4-11 ECON 3A- UCSB


UC Construction signs an agreement to construct a UC Construction signs an agreement to construct a garage for $22,000. garage for $22,000.

In January, UC Construction begins construction, In January, UC Construction begins construction, incurs costs of $18,000 on credit, and by the end of incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. January delivers a finished garage to the buyer.

In February, UC Construction collects $22,000 cash In February, UC Construction collects $22,000 cash from the customer. from the customer.

In March, UC pays the $18,000 due the creditors.In March, UC pays the $18,000 due the creditors.

Compute the net incomes for each month under cash Compute the net incomes for each month under cash basis accounting and accrual basis accounting.basis accounting and accrual basis accounting.

4-12 ECON 3A- UCSB


$ 22,000

(18,000)

$ 22,000

$ 22,000 $ (18,000) $ 4,000

(18,000)

$ 22,000

$ 4,000

(18,000)

$ 4,000

$ 22,000

(18,000)

January February March Total

January February March Total

Cash Basis

Revenue

Expense

Net Income

Revenue

Expense

Net Income

UC Construction Income Statement

Accrual Basis

4-13 ECON 3A- UCSB

Cash Basis versus Accrual Basis of Cash Basis versus Accrual Basis of AccountingAccounting

Why use the Accrual Basis of Accounting?Why use the Accrual Basis of Accounting?

The The Matching PrincipleMatching Principle -- “let the expense follow -- “let the expense follow the revenue.”the revenue.”

Expenses are recognized on the income statement not Expenses are recognized on the income statement not when paid, or when the work is performed, or when a when paid, or when the work is performed, or when a product is produced, but when the work or the product is produced, but when the work or the product actually makes its contribution to revenue.product actually makes its contribution to revenue.

The matching principle dictates that efforts (expenses) The matching principle dictates that efforts (expenses) be matched with accomplishment (revenues) be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so.whenever it is reasonable and practicable to do so.

4-14 ECON 3A- UCSB

Cash Basis versus Accrual Basis Cash Basis versus Accrual Basis DepreciationDepreciation

Assume that in January of 1999, UC Company Assume that in January of 1999, UC Company purchased equipment for $75,000. The purchased equipment for $75,000. The equipment would be useful to UC for three equipment would be useful to UC for three years. years.

Question: Question:

What impact would this equipment have on What impact would this equipment have on UC’s future Income Statements, if:UC’s future Income Statements, if:

a. UC used the cash basis of accounting a. UC used the cash basis of accounting

b. UC used the accrual basis of accounting? b. UC used the accrual basis of accounting?

4-15 ECON 3A- UCSB


$ 100,000 $ 100,000

$ 300,000 $ 100,000

$ 25,000 $ 225,000

(75,000)

$ 100,000

(75,000)

1999 2000 2001 Total

Total

Cash Basis Accounting

Revenues

Depreciation Expenses

Net income (loss)

Accrual Basis Accounting

Revenues

Depreciation Expenses

Net income (loss)

UC Company - Income Statement

$ 100,000

$ 100,000

$ 75,000

(25,000) $ 100,000

$ 75,000

(25,000)

$ 100,000

$ 75,000

(25,000)

$ 300,000

$ 225,000

(75,000)

1999 2000 2001

4-16 ECON 3A- UCSB

Flow of Asset CostsFlow of Asset Costs

Income StatementIncome StatementBalance SheetBalance Sheet

Inventory

BuildingEquipment

Prepaid Insurance

Intangible Asset

Cost of Goods Sold

Insurance Expense

Amortization Expense

Depreciation Expense

4-17 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Sales (75,000)Sales (75,000)

Income Statement

Revenues:

Expenses:

2004 2004

Inventory / Cost of Goods SoldInventory / Cost of Goods SoldInventory / Cost of Goods SoldInventory / Cost of Goods Sold

Inventory 30,000Inventory 30,000

Accounts receivable Accounts receivable 75,00075,000

Accounts payable Accounts payable (30,000)(30,000)

Purchase inventory for $30,000, Sell for $75,000Purchase inventory for $30,000, Sell for $75,000

Net income (loss)

4-18 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Sales (75,000)Sales (75,000)

Income Statement

Revenues:

Expenses:

2004 2004


Inventory 0Inventory 0



Purchase inventory for $30,000, Sell for $75,000Purchase inventory for $30,000, Sell for $75,000

Cost of goods sold Cost of goods sold 30,00030,000

(45,000)(45,000)Net income (loss)

4-19 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004





Retained earnings Retained earnings (45,000)(45,000)

Net income (loss)

Pay supplier $30,000, Receive $75,000 from customer


4-20 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004



Net income (loss)


Accounts payable 0Accounts payable 0




Cash (30,000)Cash (30,000)

4-21 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004



Accounts receivable Accounts receivable 00

Accounts payable 0Accounts payable 0




Cash 45,000Cash 45,000

Net income (loss)

4-22 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004

Building / Depreciation ExpenseBuilding / Depreciation ExpenseBuilding / Depreciation ExpenseBuilding / Depreciation Expense

Accum. deprec. Accum. deprec. (40,000)(40,000)

Building 1,000,000Building 1,000,000

Notes payable Notes payable (1,000,000)(1,000,000)

Purchase building for $1,000,000, 25 year useful life


Net income (loss)

Depreciation exp. Depreciation exp. 40,00040,000

40,00040,000

4-23 ECON 3A- UCSB

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004

Building / Depreciation ExpenseBuilding / Depreciation ExpenseBuilding / Depreciation ExpenseBuilding / Depreciation Expense

Accum. deprec. Accum. deprec. (40,000)(40,000)

Building 1,000,000Building 1,000,000

Notes payable Notes payable (1,000,000)(1,000,000)



Net income (loss)

Retained earnings Retained earnings 40,00040,000

4-24 ECON 3A- UCSB

Adjusting EntriesAdjusting EntriesAdjusting EntriesAdjusting Entries

4-25 ECON 3A- UCSB

Adjusting Entries (Accrual Accounting)Adjusting Entries (Accrual Accounting)

In order for In order for revenuesrevenues to be recorded in the period in which to be recorded in the period in which they are earned, and for they are earned, and for expenses expenses to be recognized in the to be recognized in the period in which they are incurred, period in which they are incurred, adjusting entriesadjusting entries are are made at the end of the accounting period.made at the end of the accounting period.

In short, adjustments are needed to ensure that the In short, adjustments are needed to ensure that the revenue revenue recognition recognition andand matching principles matching principles are followed. are followed.

In order for In order for revenuesrevenues to be recorded in the period in which to be recorded in the period in which they are earned, and for they are earned, and for expenses expenses to be recognized in the to be recognized in the period in which they are incurred, period in which they are incurred, adjusting entriesadjusting entries are are made at the end of the accounting period.made at the end of the accounting period.

In short, adjustments are needed to ensure that the In short, adjustments are needed to ensure that the revenue revenue recognition recognition andand matching principles matching principles are followed. are followed.

PrepaymentsPrepayments AccrualsAccruals1. Prepaid Expenses.Prepaid Expenses. Expenses paid in 3. Accrued Revenues.Accrued Revenues. Revenues cash and recorded as assets before earned but not yet received in cash. they are used or consumed.2. Unearned Revenues.Unearned Revenues. Revenues 4. Accrued Expenses.Accrued Expenses. Expenses received in cash and recorded as incurred but not yet paid in cash. liabilities before they are earned.

PrepaymentsPrepayments AccrualsAccruals1. Prepaid Expenses.Prepaid Expenses. Expenses paid in 3. Accrued Revenues.Accrued Revenues. Revenues cash and recorded as assets before earned but not yet received in cash. they are used or consumed.2. Unearned Revenues.Unearned Revenues. Revenues 4. Accrued Expenses.Accrued Expenses. Expenses received in cash and recorded as incurred but not yet paid in cash. liabilities before they are earned.

4-26 ECON 3A- UCSB

Adjusting Entries (Prepaid Expenses)Adjusting Entries (Prepaid Expenses)

Prepaids are payments of cash that are recorded as assets Prepaids are payments of cash that are recorded as assets before they are used or consumed.before they are used or consumed.

When a cost is incurred, an asset account is debited to show When a cost is incurred, an asset account is debited to show the service or benefit that will be received in the future.the service or benefit that will be received in the future.

Prepayments often occur in regard to:Prepayments often occur in regard to:

insuranceinsurance

suppliessupplies

advertisingadvertising

rentrent

maintenance on equipmentmaintenance on equipment

fixed assetsfixed assets

4-27 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)

Prepaid insurance 6,000

Income Statement

Revenues:

Expenses:

Net income (loss)

June 2003 June 2003

On June 1, 2003, Diamond Co. paid $6,000 for 12 months of insurance coverage. How is this transaction reflected in Diamonds’ financial statements on June 1, 2003?

Journal Entry: Debit Credit

Prepaid Expense 6,000Cash

6,000

4-28 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

Net income (loss)

June 2003 June 2003

How is this transaction reflected in Diamonds’ financial statements for the month ending June 30, 2003?

4-29 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

Net (income) loss

Insurance expense 500

June 2003June 2003


500

4-30 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

Net (income) loss

June 2003June 2003


Retained earnings 500

Journal Entry: Debit Credit

Insurance expense 500Prepaid insurance

500

Closing Entry:

Retained earnings 500Insurance expense

500

4-31 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

July 2003July 2003

How is this transaction reflected in Diamonds’ financial statements for the month ending July 31, 2003?


Net (income) loss

4-32 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

July 2003July 2003


Insurance expense 500

500Net (income) loss


4-33 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash $(6,000)Cash $(6,000)


Income Statement

Revenues:

Expenses:

July 2003July 2003

Retained earnings 1,000

Net (income) loss


4-34 ECON 3A- UCSB

Adjusting Entries (Unearned Revenues)Adjusting Entries (Unearned Revenues)

Unearned revenues are the receipt of cash that is recorded Unearned revenues are the receipt of cash that is recorded as a liability because the revenue has not been earned.as a liability because the revenue has not been earned.

When cash is received, a liability account is credited to show When cash is received, a liability account is credited to show the obligation to provide goods or service in the future.the obligation to provide goods or service in the future.

Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:

rentrent

magazine subscriptionsmagazine subscriptions

customer depositscustomer deposits

airline ticketsairline tickets

school tuition school tuition

4-35 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash 12,000Cash 12,000

Unearned revenue (12,000)

Income Statement

Revenues:

Expenses:

Net (income) loss

October October

Pioneer Advertising Agency received $12,000 on October 2 from R. Knox for advertising services expected to be completed by December 31. Analysis reveals that $4,000 of those fees have been earned in October. How is this transaction reflected on Pioneers’ financial statements for the month of October?

4-36 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash 12,000Cash 12,000


Income Statement

Revenues:

Expenses:

Net (income) loss

October October


Advertising revenue (4,000)

(4,000)

4-37 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Cash 12,000Cash 12,000


Income Statement

Revenues:

Expenses:

Net (income) loss

October October


Retained earnings (4,000)

4-38 ECON 3A- UCSB

Adjusting Entries (Accrued Revenues)Adjusting Entries (Accrued Revenues)

Accrued revenues represent revenues earned for which Accrued revenues represent revenues earned for which the cash has not been received. the cash has not been received.

An adjusting entry is required to show the receivable that An adjusting entry is required to show the receivable that exists at the balance sheet date and to record the exists at the balance sheet date and to record the revenue that has been earned during the period. revenue that has been earned during the period.

Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:

rentrent

interestinterest

services performedservices performed

4-39 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Unbilled receivable Unbilled receivable 2,0002,000

Income Statement

Revenues:

Expenses:

Net (income) loss

October October

In October Pioneer Advertising Agency earned $2,000 in fees for advertising services that were not billed to clients before October 31. How is this transaction reflected on Pioneers’ financial statements for the month of October?

Advertising revenue (2,000)

(2,000)

4-40 ECON 3A- UCSB


Balance Sheet

Assets:

Liabilities:

Equity:

Unbilled receivable Unbilled receivable 2,0002,000

Income Statement

Revenues:

Expenses:

Net (income) loss

October October

In October Pioneer Advertising Agency earned $2,000 in fees for advertising services that were not billed to clients before October 31. How is this transaction reflected on Pioneers’ financial statements for the month of October?

Retained earnings (2,000)

4-41 ECON 3A- UCSB

Adjusting Entries (Accrued Expenses)Adjusting Entries (Accrued Expenses)

Accrued expenses represent expenses incurred for which Accrued expenses represent expenses incurred for which the cash has not been paid. the cash has not been paid.

An adjusting entry is required to record the obligations An adjusting entry is required to record the obligations that exist at the balance sheet date and to recognize that exist at the balance sheet date and to recognize the expenses that apply to the current period. the expenses that apply to the current period.

Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:

rentrent

interestinterest

taxestaxes

salariessalaries

bad debtsbad debts

4-42 ECON 3A- UCSB

Adjusting Entries (Accrued Expenses)Adjusting Entries (Accrued Expenses)

Balance Sheet

Assets:

Liabilities:

Equity:

Salaries payable Salaries payable (7,500)(7,500)

Income Statement

Revenues:

Expenses:

Net (income) loss

October October

At Pioneer Advertising, salaries were last paid on October 26; the next payment of salaries will not occur until November 9. After October 26, only three working days remain in October. Employees receive salaries of $2,500 per day. How are the unpaid salaries reflected on Pioneers’ financial statements for the month of October?

Salaries expense 7,500

7,500Retained earnings 7,500

4-43 ECON 3A- UCSB

January, 2003 Transactions for Ace Inc.January, 2003 Transactions for Ace Inc. Ace Inc., issue stock for $77,000 cash.Ace Inc., issue stock for $77,000 cash.

Cash Cash 77,00077,000Common stock Common stock 77,00077,000

Ace purchased inventory for 52,000. Balance due in 45 days.Ace purchased inventory for 52,000. Balance due in 45 days.

InventoryInventory 52,00052,000Accounts payableAccounts payable 52,00052,000

Wages due employees for January amounted to $5,000. The wages were Wages due employees for January amounted to $5,000. The wages were paid in February.paid in February.

SG&A expenseSG&A expense 5,0005,000Wages payableWages payable 5,0005,000

Sold inventory costing $10,000 for $25,000. Customer has 30 days to pay.Sold inventory costing $10,000 for $25,000. Customer has 30 days to pay.

Accounts rec.Accounts rec. 25,00025,000SalesSales 25,00025,000

COSCOS 10,00010,000InventoryInventory 10,00010,000

On January 2, paid $3,000 for advertising to On January 2, paid $3,000 for advertising to be done in January and be done in January and February.February.

Prepaid advertisingPrepaid advertising 3,0003,000CashCash 3,0003,000

On January 2, purchased a copier for $6,000 cash. Copier is expected to On January 2, purchased a copier for $6,000 cash. Copier is expected to be useful to Ace for two years.be useful to Ace for two years.

EquipmentEquipment 6,0006,000CashCash 6,0006,000

Received $15,000 from customers for amounts owed to Ace.Received $15,000 from customers for amounts owed to Ace.

CashCash 15,00015,000Accounts receiv.Accounts receiv. 15,00015,000

4-44 ECON 3A- UCSB

Ace, continued from prev. slideAce, continued from prev. slide

From the previous slide, which items require an adjusting entry at the end of the month?

Advertising to be performed in January and February- one month consumed:

Advertising expense 1,500Prepaid advertising 1,500

The photocopier good for two years- 1/24th consumed:

Depreciation expense 250Accumulated depreciation 250

From the previous slide, which items require an adjusting entry at the end of the month?

Advertising to be performed in January and February- one month consumed:

Advertising expense 1,500Prepaid advertising 1,500

The photocopier good for two years- 1/24th consumed:

Depreciation expense 250Accumulated depreciation 250

4-45 ECON 3A- UCSB

More Advanced ConceptsMore Advanced Concepts

The income statement “closes” out to what?

– RETAINED EARNINGS If income is the only activity impacting

retained earnings, what difference is there between retained earnings and an income statement which is for the period from inception to the date of the balance sheet?

NONE

The income statement “closes” out to what?

– RETAINED EARNINGS If income is the only activity impacting

retained earnings, what difference is there between retained earnings and an income statement which is for the period from inception to the date of the balance sheet?

NONE

4-46 ECON 3A- UCSB

More Bonus MaterialsMore Bonus Materials

The balance sheet approach. BECAUSE A=L+E, problems in one argument become apparent in another. You can run, but you can not hide!

If a company had overstated revenue, how might management or the auditors detect this?

– ACCOUNTS RECEIVABLE—

Understated COS?

– INVENTORY

The balance sheet approach. BECAUSE A=L+E, problems in one argument become apparent in another. You can run, but you can not hide!

If a company had overstated revenue, how might management or the auditors detect this?

– ACCOUNTS RECEIVABLE—

Understated COS?

– INVENTORY

4-47 ECON 3A- UCSB

Key Terms Quiz, pg. 187

Questions 1-6, 8-9, 11-19, pgs. 188-189

Chapter 4 Assignments for StudyChapter 4 Assignments for StudyChapter 4 Assignments for StudyChapter 4 Assignments for Study

LO 2

Exercises Problems Cases

LO 1

1 1

2, 30LO 4

LO 3

LO 6

LO 5

LO 7

3-14, 16, 30 2, 4-7

18-19

20-21, 23-24

Solutions available on class web site.

Underlined numbers represent assignments that apply to more than one Learning Objective (LO).

Documents

4-1 ECON 3A- UCSB Income Measurement and Accrual Accounting Income Measurement and Accrual Accounting Chapter 4