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BeginBeginPurchase or Purchase or manufacture manufacture products or products or supplies on supplies on
credit.credit.
Purchase or Purchase or manufacture manufacture products or products or supplies on supplies on
credit.credit.
Deliver product Deliver product or provide service or provide service to customers on to customers on
credit.credit.
Deliver product Deliver product or provide service or provide service to customers on to customers on
credit.credit.
Pay Pay suppliers.suppliers.
Pay Pay suppliers.suppliers.
Receive payment Receive payment from customers.from customers.
Receive payment Receive payment from customers.from customers.
The operating (or cash-to-cash) cycleThe operating (or cash-to-cash) cycle is the time it takes for a company to pay cash to suppliers, sell those goods and
services to customers, and collect cash from customers.
The Operating Cycle – Underlying Accounting Assumptions
Time Period:Time Period: The long life of a company can be The long life of a company can be reported over a series of shorter time periodsreported over a series of shorter time periods..
Time Period:Time Period: The long life of a company can be The long life of a company can be reported over a series of shorter time periodsreported over a series of shorter time periods..
Recognition Issues :Recognition Issues : When should the effects of When should the effects of operating activities be recognized (recorded)?operating activities be recognized (recorded)?
Recognition Issues :Recognition Issues : When should the effects of When should the effects of operating activities be recognized (recorded)?operating activities be recognized (recorded)?
Measurement Issues:Measurement Issues: What amounts should be What amounts should be recognized?recognized?
Measurement Issues:Measurement Issues: What amounts should be What amounts should be recognized?recognized?
Results of continuing operationsResults of continuing operations can be presented in one of the two formats
Single step format list all revenues followed by all expense items and then shows the difference between revenue and expenses
Multiple step format cost of goods sold are deducted from sales to present gross margin (or gross profit) as a subtotal. Other operating expenses are then deducted to show operating earnings (income) as a second subtotal
Discontinued OperationsResult from the disposal of a major segment of the business and are
reported net of the related income tax effect.
Elements on the Statement of Earnings
Discontinued operations are presented separately because of their non-recurring nature and thus are not useful in predicting the future earnings of the
Assets, liabilities, revenues, and expenses should be Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them recognized when the transaction that causes them
occurs, occurs, not necessarily when cash is paid or received.not necessarily when cash is paid or received.
Assets, liabilities, revenues, and expenses should be Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them recognized when the transaction that causes them
occurs, occurs, not necessarily when cash is paid or received.not necessarily when cash is paid or received.
Required by -
International
Financial
Reporting
Standards
Required by -
International
Financial
Reporting
Standards
How Are Operating Activities Recognized and Measured?
Recognize revenues when . . .Recognize revenues when . . .The entity has transferred to the buyer the The entity has transferred to the buyer the
significant risks and rewards of ownership.significant risks and rewards of ownership.The entity retains neither continuing The entity retains neither continuing
managerial involvement nor effective control managerial involvement nor effective control over the goods sold. over the goods sold.
The amount of revenue can be reliably The amount of revenue can be reliably measured.measured.
Collection is reasonably assured.Collection is reasonably assured.The costs in respect of the transaction can be The costs in respect of the transaction can be
measured reliably.measured reliably.
Recognize revenues when . . .Recognize revenues when . . .The entity has transferred to the buyer the The entity has transferred to the buyer the
significant risks and rewards of ownership.significant risks and rewards of ownership.The entity retains neither continuing The entity retains neither continuing
managerial involvement nor effective control managerial involvement nor effective control over the goods sold. over the goods sold.
The amount of revenue can be reliably The amount of revenue can be reliably measured.measured.
Collection is reasonably assured.Collection is reasonably assured.The costs in respect of the transaction can be The costs in respect of the transaction can be
Revenue Principlesituation #1 – cash is received BEFORE revenue is earned
If cash is received before the company If cash is received before the company delivers goods or services, the liability delivers goods or services, the liability
account account DEFERRED REVENUEDEFERRED REVENUE is recorded. is recorded.
Revenue Principlesituation #2 – cash is received ON the date revenue is earned
When cash is received on the date When cash is received on the date the revenue is earned, the the revenue is earned, the following entry is made:following entry is made:
Revenue Principlesituation #3 – cash is received AFTER revenue is earned
If cash is received after the company If cash is received after the company delivers goods or services, an asset delivers goods or services, an asset TRADE TRADE
The Matching Processsituation #1 – cash is paid BEFORE expense is incurred
If cash is paid before the company receives If cash is paid before the company receives goods or services, an asset account, goods or services, an asset account,
PREPAID EXPENSEPREPAID EXPENSE is recorded. is recorded.
The Matching Processsituation #3 – cash is paid AFTER expense is incurred
If cash is paid after the company receives If cash is paid after the company receives goods or services, a liability goods or services, a liability PAYABLEPAYABLE is is
(e) Sun-Rype paid $740 in advance for the following: $160 for insurance covering the next four months beginning January 1, $450 for rent of warehousing facilities for the next three months beginning
January 1, and $130 for advertising to be run in February.
Analyzing Some of Sun-Rype’s Transactions
Debit Credit(e) Prepayments (+A) 740
Cash (-A) 740
= Liabilities +Cash -740Prepayments +740
Assets Shareholders' Equity
Equality checks:1.Debits $740 equal Credits $740,2.The accounting equation is in balance.
The balances in the statement of financial position accounts and statement of earnings accounts after posting the transactions to the T-accounts (all revenue and expense accounts begin with a zero balance).
Interest and div idends on investments + Cash paid: Suppliers -
Employees -Interest on debt obligations -Income taxes -
Cash Flows from Operating Activities TotalInvesting Activities Purchase of property, plant or equipment - Purchase of other long-term assets - Sale of property, plant or equipment + Sale of other long-term assets + Cash Flows from Investing Activities TotalFinancing Activities Issuance of long-term debt + Issuance of contributed capital + Dividends paid - Repurchase of long-term debt - Repurchase of contributed capital - Cash Flows from Financing Activities Total Net increase or (decrease) in cash Beginning balance in cash account Ending balance in cash account
Direct approach to preparing operating cash flows.
Direct approach to preparing operating cash flows.