Download LO1 - McGraw-Hill Education Canada

Learning Objectives
• Understand the Business
– LO1 Describe common operating transactions and select
appropriate income statement account titles.
• Study the accounting methods
– LO2 Explain and apply the revenue and matching principles.
– LO3 Analyze, record, and summarize the effects of operating
transactions, using the accounting equation, journal entries, and
T-accounts.
– LO4 Prepare an unadjusted trial balance.
• Evaluate the results
– LO5 Describe limitations of the income statement.
• Review the chapter
© McGraw-Hill Ryerson. All rights reserved.
1
Operating Activities
• Operating activities are the day-to-day functions
involved in running a business,
• Typical operating cycle activities include:
– Buying goods and services from suppliers and
employees
– Selling goods and services to customers
– Collecting and paying out cash
LO1
© McGraw-Hill Ryerson. All rights reserved.
2
Income Statement
• The income statement summarizes the
financial impact of operating activities
undertaken by the company during the
accounting period.
• Operating activities are the primary source of
revenues and expenses.
• The time period assumption divides the long
life of a company into shorter periods, such as
months, quarter and years
LO1
© McGraw-Hill Ryerson. All rights reserved.
3
• Revenues are the amounts earned by selling
goods or services to customers
• Expenses are the costs of business necessary
to earn revenues
• Net Income is the excess of revenues over
expenses
• Net income indicates the amount by which
shareholders’ equity increases (or decreases)
as a result of a company’s operations
LO1
© McGraw-Hill Ryerson. All rights reserved.
4
Income Statement Accounts
PIZZA PALACE, INC.
Income Statement
For the Month Ended September 30, 2012
Revenues
Pizza Revenue
$
11,000
Total Revenue
11,000
Expenses
Supplies Expense
Wages Expense
Rent Expense
Utilities Expense
Insurance Expense
Advertising Expense
Income Tax Expense
Total Expenses
Net Income
LO1
$
4,000
2,000
1,500
600
300
100
500
9,000
2,000
The heading states the name of the business,
the title of the statement, and the accounting
period
Revenues earned from the sale of pizza to
customers in September
All costs or expenses incurred in
September to generate revenues
The difference between total revenues
and total expenses is net income
© McGraw-Hill Ryerson. All rights reserved.
5
Cash Basis Accounting
• Reports revenues when cash is received and
expenses when cash is paid.
• Not allowed under GAAP.
Accrual Basis Accounting
• Reports revenues when they are earned and
expenses when they are incurred, regardless
of the timing of cash receipts or payments.
• Required under GAAP.
LO1
© McGraw-Hill Ryerson. All rights reserved.
6