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    CH 3

    Uploaded by

    Diala Yazbec

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    © All Rights Reserved
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    of 23
    ae income Statement Concepts: Income, Revenues, and Expenses Did you ever recive a chat letter asking yout send, ay $10, 10 the person he sent F to you? Ke bso tls you to send he eter onto . 10 fiends ‘After tling you about he awl things ht hap : pened to people who break these ching the lt ter wilt to convince you to go along by okng out how much money you cou make Just thi Aer each of you 10 fends sends you '10,you are $80 ahead! What ea money! ‘Would you realy be $80 ahead though? Nething of ‘ale i reduced. Money ony suf around, The $100 your fends sent you seal 2 contbu- ton of equity. The same i tue forthe $10 you sent 1p the chin No one really ean ny nea. n accunting terns, the people wih subscriber ‘hese chains are confusing income ae capita Many fancial alaniies ae dsgused forms of ‘hain eters end they rely om eating capital ontibuton wih ineame. One ofthe latest oc: cured in Albena In 1997 Fh rom abandoning 2 Communist resi and inhabing one of Europe's poorest nation, basins sold thie apartments and borowed mney rom elaves read 2 inves in schemes promising interest tates 2 high es 25% per month That’ equa lent oan intrest rat of 135% per yea!) ‘About the lowest ate promised by these schemes was 8% er manth, which sequent wo 152% er yea Ealy on, these ates appeared eal oie vestrs because some were actualy peit—tom ‘he capt contbutions of oer investor! Be- ‘use wealth vas nt being cestd, he schemes ‘collapsed. When many Albanians lost al heir wea, he country plunged into tum. Wie spread arson lotng, and violence caused the ‘Abasiangoverament to impose a naonvide state of emergency ints atenpt to estore onde ‘is chapter focuses onthe income statement, end thas to main goals 1. To eer he economic concep tat under tthe incon sateen income, rererues, and expnss 2. To extend te accouming technigues of debts ed rei fo the messerement of income ‘The ecormic cance of Ice iso ofthe ost poweil ad important ides accountants sein ung th nana itd of engariza ‘ns An nty'sncome for 2 pid i moet lays the primary measure of ts Rec pe ferance. Incr pay a majo nthe dec sls of investors and nani analysts who asin valu tothe nbs stock, assess is creditor sand evaluate the perfomance of is manage ent. Income is inportant, and we wl tly in depth inthis chapter rl throughout Bok ‘As ein Chast 2, we sho how debits nd cds ae used rc rnsactons as hey ec Because te income statement rates o economic. eels oer a pera of ie racking tings as they occurs more ingrtant forth inca statement ‘han for he blocs shast. isso ingrtant that we il ee awl new sof accounts vented Just to record ever and expenses, which ae the ‘component fins These acount ced em porary accounts we sed enly to meas inca and appa only on he income statment. They never appear on fe balance she We bein by dein Income, even, and ek pense. We give mary examples of revenues and ferpenses but swith asset and ables, ts imposible to st them al. The aces ofthe ety aft the exact ies of the venue and ‘pense account that apear ont income sate ren We demensate how to use debits ad ‘eis to record venues and expenses. Me work ‘trough 2 compldhensv earl ousrate how debits and cect ae usd in messing i= ‘ame Along the way we look ata actu carpo- rat income statement, ossicrive 1 name even se ene | Income esse inerese (Geers) case ‘lng fom operons re por of ie Notas ae the ea of ‘ign Income (Loss) Income sm ints n a entity's net ane esting Hom its opestios over period tftime Iran ents operations over pod of ie rest In 9 decease fa nek, ‘sci har lose Tre import picts nak up the definition of income and los: + ners (or decease) in ptosis 1 Resulting fom an ent operations 1 Overs period of ine We no dcus each of there three pa in deta Fst et os define net sets. We stat oun the fundamen nt fr the ance sheet ASSETS = LIABILITIES + EQUITIES ‘etasets are the excess ofthe enys economic retour ase) ove is oblan- ions (bites). Rewriting the accounting ent, we sez [NEP ASSETS = ASSETS ~ LIABILITIES = EQUITIES That in net aes x anothor name for soto equity ‘Now with adefinton of met ast and, we can explore Bow net sts in crease or decrease ovr a period, For example conser an increase in net aes Net so increase era period when the eniy increases the gap between is economic ‘Ssoures and ite obligation, which can heppen in many sey ONbgatios could re- fnain fed and recouresculd incense resrces could reals consunt and ob- Tgations Sevens Both bligntions and retaurce could ners, Dut eesoures more than obligations We wil se this scenario i anally the case for growing companies, Fnaly both obligations and resources could decreas, with esurces decreasing less {aa obligations “fo see whether net ita cress o deceased ver a perio, all eee i 10 bance sects one ato the begloning of he period and anor a ofthe eod ofthe Det the total shacholder equity near, oe know that net ssl ceased Wi Exh then locks the atts ant alison the wo Balance sets to Rae ot which ‘Sombisatoa of nceises nd decresses ine ses and lables generated the increase in harsher egy ‘An incene inet sets ovr a pesos only one ofthe requemsns fr income, however to be inom he ners ane acts tbe the ros ofthe eal pera tions “Opeatons irs dic concept o psn easier tose what or operations nd define apeatione a everything ce Un eto define operations diet Here sce thedhings hat arenot persone cpa ransctons with owes For same exchanging ‘ates of th nity’ common took for cash ep wansaction, nt operations. in tcc tape sales» pote oe mone yi es “Another good example of capital tanstion with nes isthe pament of eh siden The payaeat of eth dividend to sarcholders is a capa asacion with ‘woes not operations Net mses dereace case cath bas een distal to ove, ‘ot ured up i operations. Intel the pyment of exh dividend to shareholders i ny of stung to them pat of thirst the cau Te not he consamp= tino esoures by the ent in earyng ea its anetions “The final important torn the defition of net income thatthe increase in et assets orure over particular peiod of ime. Income secs or als Pre- ‘tel fornia of, be i mn garter, or a en Tn ssesing a nese Inve sets, we shoal! specify an inte fom a beginning point to 33 end poi. ‘Any chopping up of ine i aici nan acountant or anager must ay cate Fat stenion to dates Aa income samen always presented forte period beween a) sae Tine sen of ca Se nan ane Se LE es (Re TRC the dates of two blanc sees dat sa begining balance shost describes the site tne aes a the sar ofthe periods income statement describes the changin het ses fom operations over the peod, anda ending lanes set describes the Site of net ssa he end of the pesod. The time covered bythe sseountingHis- tory should be fe from any gape" igus 3. Ulststes the time aspects of income Salements and balance sheets Co aie or see siete shane | se tie omnes | vers “arene Powe booes thon stone "These points can be seen in CAC! Interrationat's balance sess and income ste- ‘ents in Exhibits 3.1 and 3.2 shown on pages and 47 respective. CACI sa i formation sisters and technology services company. It provies stom sfttes fanmnieatins, and network sevice, maging and document management tv ety of governmental and pte sector orpaniastions (CACT toa shrcholdes qty net ete) went fom $14,968 thowstnd on ane 34,2000, to $16,205 thousand oa Jane 30,200, an increase in ost ae of S18256, thousnd. CACTs income statement seve the prt ofthis ehange Ine ats ht sulted foes operation in fst, CAC ish tsnme sane ssement of pers Hons). Revenos, direct enes, indies and sling expemen deprcion, and Sorintion all are fom operations, CACT dos aot pay dvdends, but it ids the Sividends would not appear as pre of the net income eleltion inthe income ste ‘ment Remember that amon tock cash ideas are rations to ohne, not > "expense ofthe empaay. ACTS income satel shows tht operations oer the set ned Tune 30,201 ncesed net aes by $2920) thous, Other ems decened| et ses ofall oF $18,236 toon ‘Note how the 200 income semen “box” by the Fone 3, 200, ad ne 30, 2000, balance sheets. To see the lnk beeen the income satement fr the year ended June 3,201, ad te ane 30200, an June 2, 20%, bance sees, ben wh the hersation that net ae nereses om operations (tio) a elie in the ‘abit 3.1 CAc amar aes Sat asses 2001 Carentan ‘Cah end sens san ‘ale nessa Usbitet 1036 ‘alanis eecible — SESB9T Delores nae es o alee tre com 36 Prepdemenmsadeber 8362 ‘uleineateser was | Properyandegsipmeanet $5685 ‘eouiresabis longterm 13686 | eocril a8 | Stherase nase alee amet 2309 “nae at Het erations ne 2, nist? Bolace Shoe) (dota in ssa sept sha deta) ‘HABILHS tm seanzOLDERS' UTE Jone 30, Curenibitie econ s nan $708 Ofieracue expense vam 23888 Acrd compentin ‘tod berets 25366 cone er patie 138 Dalene nem ts saat __ sunt “ob cet ais tam Tene Note parang erm sam 28 Delete em expense fie bans alate nome mes 2 Other anges eigatons “al bes Starhcder euty Common soc ‘Sh0 parva, 000000 sates 15244900 and 15007000 ihe teed Captain oc fps ebined eninge ‘be eq ims "al neti guy “ul bien halle uty etind eanings acount in he lane sheet Wit fee unusual exceptions, the fo- Towing i te Belang Rese Eins + NetIncome 2 Coiba > Ending eid Taran ‘This pints important wo nemembebecruse one ofthe eset hl in reading Sana tenets eto understand how 3 suber o ery none saemen isi ‘ee pumber ot lem in noth igure 3.2 provides a gropbieal uration ofthis fin, les be aboltly erin that yu understand i wit 3.2 (Gunmt nthe) Reaves Cnt expen Discreet ‘eome or cot eer Disoninued operations ‘Gainon por of CO ‘ean ging Resin riage ls ences col me taeome - 4% > eterno ee Ineo spas Change Find Eins) Reyes rr nes {nett etn fom ‘spraton ovr 3 per of (Nae 10, 200, Wet (ts ch for 3300 6f sor permed. In the ae of CAC Iteration, we se fom the income statement and balance sess in Bibi 31 and 32 tat the flung Is rue ean rings (200) s1ao97 + eae (6000-83000 3130) Stns aings (OBIT 7 ‘The change in tained eanings over the yr i sally epi by et income, wich hls uo ake the core inference at CACI didnot py eh dividends hate- oles dosing the ys ‘GACT et income of $2330] thousands north cng oexpin the $1,236 shogsand insets in nt stb oe 34, 2D and Jone 30,200. Therefore ‘ome tedactions mst our smeere, Te ening smoun Tobe explied S126 craein eases (so) Neinome EES) Desewe i ne ass rom freer han he coe ‘The decrease jn et ast to be exe it actus gr than $3,055 thownd. The common sok and capt in exces of pur accounts al increase The increase in hese {count in atacd bys capital traction with shartoliers te suace of commen ‘Node ata tale above par The common wok account increased y $28 thousand suse ‘Baan os ane 30,2001 "301) Bane on Jane 3,200 La Ince Comme Stock bee ad Sse 6, 2000 nd fare 30201 The capil io eses of pr ascoan incase by $5,081 housad 26707 Baluceon fe 3, 2001 , Balan on ane 0, 2000 ECRIRT Ince a Caplin ce of Tor eee Je 200 ad ee 30,2001 “The ne come and the changes in Capital in Exc of Par and in Common Stok weat Up bya total of $27,410 (922301 + $28 + $5081) thousand. Net Assets went up By 18286 thoacand The diference, 85.174 Umusand,s explained by changes in the sare- folder equity acount Fer Othe Equity Tene, Ths account rs elec for to =~ tons: Fish we sx that i agai, whee means har 3 debit Blane Second, the Ente that ive seo thi aesoant se heyond our rach tt polat i he Book For tow ets explore farther the ince statement. Revenues {CActSs income sttement shows the type seakdows of income into evens ae ex pense Net income fe net et of sabtncing dhe expense fm the revenves. Revanace a inteses sus or dense bie sang rom operations. Revena nections tough tome cambintion of inessing ast nd decreas Inglis A good ine deinson won be that eenue isthe dolly vale (mon- ‘tary masae) rece in exchange or the god given up or src provided, Inthe Websal example of Chapter, tapas that the company bled cen 3.00 fox programming serves performed frend Atishiee Baits ‘econ Rcsble $00 Reine Eines son ° + March 1, 2006 cash nee 3.00 fut Soe (on spi 202008 a of {ese proved end rout mde acogaton be at of ang a ey no he osene Region Crit Eunngs proc complete Ech Couapten | incon starenent cowctors: MCOME, NEvERUEE AnD ExPENEEE = 4 In his case an ase, Accounts Resvbl, created when recording the $3,000 of reve by incesing eetaned exenngs ‘te other hand uppore Webel ntl ied $300 etsine Grom aint price othe performance of any service That eansscuon aft the balance see Fils en = Atittes Agus San Oblgon eciee ssp00 00 = sion + ° ‘hen the services are ally provide othe cnt, Weds would coed the re¥- enue (incense Retained Earnings) and decrees ebligatin wo provide service tothe lent by 83,00. Sdente Stisbaes + glee ‘blation for Servie {Wc 53000) RatinedEarsinge 58000 ‘ eI si3n00) + sso ‘Themajrisuein accounting or revenues ven to ecogaie them in thea Recognitions the ct of formally entering an ten it the acoussng records A em isrecogied when an scountat mas he debts and credits requied vo account for itn the fist example Weve tecognized the reeaue fom the consulting asgnment ‘hen the work was completed andthe cient ble, At tht poi ny scbanting oly was made debiting coun Receivable and ceding Retained acong ‘Why did we eecgnize venue upon Websal’s bling of the cen? If Webs i ike os: organzaons, the procs of eamlng revenues is continua ad many rypes Of revene-pneating nes are excuringsmulancous, When Websel gts i bsi- ‘sn fl sing, sy te taining programmers and cosutaats to peoide Serves to fre ce searching for new eens, submiting bids for new wot, per- {bering Wes invacioa sages fretting cents and sting calcio of aex003 {oc jobs completed. Thse avis wil al belagpeaing at the same tine, hough for ‘ny one client thy ocr in sequence, ven if we fess on one eens no ply legal dime specifies when i the ean ings process the reve should be recogaized,Reogniingvevenbe at the tne con sultant eomplte ther ening would seem prema, Wh wl be the cent? Wil {he projects be completed Une? How much wl cnt pay? How many cet all sot poy opt Af the other extreme, recognizing ceveoue oly when cents sede thelr account seems to sense Most clint an be expected pay for job thet Websll eompltes ‘iba proba wont wor forces bees wont py fo i services “This hak leds ust loo someere bene the taining of constants ad the ellecon of esh fom ls Ia oad terior, ad we ate lel tobe abe tosette the mater ith log Whit we nee sa convention. The baie ofa revenue isha a increnein income from operons Operations are he ety aces that ae sme at earning a prt The convents for revenue rocaguition hen he tarnngs process is complete or substantial compte, when an exehangehetaken pce, fn when the amount ef the revenue can be measured with some accrary and the ty seasoably sue of election Inthe cae of Nebel contig ate, the ev enue econ era would Be met hen the work i comple andthe cet Is bie atthe pat, Webel ulate othe i is sapling he nts Falllment of end Malar one of he fr roi fme the ted ‘tes tat lt eure often “alr” Staal complation ofthe ene Ings process practic, rough, {sila o when to recognize even {his oo rough for sme speciale c= ‘meine and accumtants te ope Sly tore eles ay the need eres For example specie rreaue recog. ‘on rls ae sed for longterm con Strucionprojectsandmsning Hower, in mt cies ssn eompleon Incas when the good or servic is de- Tiered wo the estomer Tan eathange ting place regules denied oye. fst because a ve ‘en cleaner mintatrer proces ‘ance thats ached and wating 0 be sold doesnot mea ha manufctcer is the ight revognize even. Ayer of ‘he machine must be found ly, the good o service x proce and baer found, onde co veg eevee we misao be resonably eran ofthe amount the ayer sto pay us and the dat of recipe ofthe payment. ‘hgrest many for-profit fms in Se ait Stats ell their ain revenue “Sales” “Marching frm uch ss Wal-Mart and LC. Feaney, uy gods fom supplies and ‘elthem to seal stones, Manfacturing ems, ike the steel producer USK, make roduc to ll other firms In their eae Sales» good dseplon of the major urce of he rvenac. ‘Sevies firms puch es Accenture and same divsont of General Elec, might st sevens fom performance of revi 8 Sls of Services” Tol Bing or i= ly"Revenace Finacial nsaions such the Harington Financial Goup cen ree= rte by leading money and charging interest. Their income sateen hav a line for teers Inco whichis anther ae Or ners Revenue” ‘el Lyach ha teenie from “Carmmision “Ast Management and Portfolio Service Hee” andinverment Banking” Tre company charges these fs forthe various Financ services t performs fr cusomers Insurance coven use "Preium Revenue” A company that ld he copright fora papular novel ight eats” Ye Univers inte Tuton Revere” a fue for “Grane end Contract” A fndord elles “Rat” A ey calles revenues ftom "Progeny ates "Licena nd Perms and "Fine "As with ats bites and spicy, too many diferent source of revenues and twomanydferenesin acount ames preven providing cmpechesive it of al pet Sfveveniet you tend many final termes, ou ll oe infer what an em Ho the way it rested. For cramp, ners maybe esbed or pid." Is led among othe reves or ent up inzensing income you ay be eessonbly Sore tht hs amounts represent inter revenue, aot ittest expe. Expenses Economist sully tke cet for saya "There io sich thing a a ee lune" Bat fo one tabes this yang mote seis than an scenantant Aa acmuntne who eco ‘ites vende which ae increases in net economic eourcs, immediatly asks Wat ‘xourses wee consvned in the procs ofeaming those events. "nites in acount name cui ao aaopinesinnkaonl counting Een ein Enghrspeaing count fn chalerging spy cs Sandal pat ng a Stanes For xmpls nthe Unites Kingdom ale revenues sonetibs cle "arnver™ pense ae gos dace invet ase reali om croton eer pido aching te proces of © akg srl he cots in- Sot in geeraing heer es eae in paid ‘He taenaepess ha pnd gue 33 Expenses ae the ates wed obits ised inthe preces of caring out op rion Eapeses she things that dress inne, the atic inthe gern ‘STrvnie Ths tnount etal ivoes some combination of decreasing ass a t- ‘resiag lability For example when Webel eve i consign sey ‘hr seer dierent kinds of expense Wells suey uses some’ tie and sil, fer which compensation mt We pai Webs ps workers ea then thease Cash ‘woul be dcrested Well hs ot yt pid workers, as a ligation to dee the fxm of Wags nel An sceoumantr tine would be to make sre obgations to ‘vos wre ec wheneser the eens rom he het i ecopind "The power of loin forthe expenses corespondig to recognized reveme called matching, Matching involves looking for assets esured or Eats cuted in the feertion of evens. some of Wess rent was pepad and then espe ding the term of» comulng segment, abou reord Rept Espense anode wil he the of thn ata gh Fguce 33 rates the secounting lg tbat unde con ‘Scustion af the income statement Revenue Recognition Cetra Income Siena ‘am _ : Rem seb BERETA panama 1 Rat catan ‘ at i ay Lodi We can finds any eftent types of espeneas there are ass ad payables. Bc amples of some ofthe tos comnign pes of gene alone Tov WakMat and J Penney the "Cos of Se” he expense associat with the oat of methane sol to customers “Interest Espen” she cost of using money for {pind of ime "sai and Wage isthe cos of labor. “Rent Expenses the cos of Fenting ast uly la or bung each w fees or warcowses. “Dereon” is the cto wing longtrm ast sich ae Proper, lat, sod Equipe Recogsting expenses means making the arma sccounig ety orcad the es piraion of an ase othe ncrence fib As with rereneFecogition, ro ‘ising expenses apts nto the we of convestos, and for mach he same roa [Rms comtaualy acqute sod consume ase and maybe unclear how the con umpion af an uc date o 2 partclr revenue For camp, any lumberyaeds find etal The sands parchoned bythe trwliad and dumped ino an open aft Ith tov wale Carre oder are ied by henlng sand ott ofthe ae No ae- ‘tnt ca ely tl wha particular roads partir cstmer's order was ied ‘om In atte customer muy purchase and was mau of several 52+ rary tanpeuenracs oF accounting Accrual acouting 307 Inthe of sou te eveue and eens Sot Ue reap and opens he Pigue 34 eo Acca ist Seder red ce sath ton) Because snot possible and ot est to sete the sue of easy what sand the customer bought erly on conveticas to match the costo lr wi alesis fot important in such 3 tution fo mast reves with consumed sit to pete ‘What wil determine the succem ofthe mberyand in eling snd ithe ttl venue teetete om sed sls lative othe ttl sow of phasing and stocking snd? "Wesee many dent cometians ford espenes, and they arsomewhat adr to cape in unary native concep sich ssn omen ofthe eamings roast" The comenton for espanis vr) ot denn ome Spe he expense Some nats are crc relsted fon amo ef reser camp ny seve

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