AFM101 Chapter Notes - Chapter 3: Deferred Income, Accrual, Financial Statement
7 Jun 2018
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• Discontinued Operations
o The net earnings or loss from a discontinued a component are disclosed separately on
SOE as discontinued operations
• Earnings per Share
o = net earnings / average number of shares outstanding
HOW ARE OPERATING ACTIVITIES RECOGNIZED AND MEASURED?
• Many local retailers and small business use cash basis accounting which records revenues and
expenses when cash is paid regardless of when they were incurred
Accrual Accounting
• Using a cash basis can report higher net earnings because :
o A customer paid cash in advance of receiving a good or service
o The company postponed the payment of utility bills until the next period
• In accrual basis accounting, revenues and expenses are recognized when they occur
• Revenues are recognized when they are earned and expenses when they are incurred
• The revenue principle and the matching process determine when revenues and expenses are to
be recorded under accrual basis
The Revenue Principle
• = when revenues are recognized by transferring risks and rewards of ownership to the buyer,
probable that future economic benefits will flow to the entity, and the benefits and the costs
associated with the transaction can be measured reliably
• The following conditions must be met for revenue to be recognized:
a) The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods
b) The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold
c) The amount of revenue can be measured reliably
d) It is probable that the economic benefits associated with the transaction will flow to the
entity
e) The costs incurred or to be incurred with respect to the transaction can be measured
reliably
• Companies usually disclose their revenue recognition practices in a note to the financial
statements
• When revenue should be recognized depends on the nature of the products sold and services
provided
• Cash can be received: 1) before the goods or services are delivered, 2) at the same time, or 3)
after they are delivered
Recording Revenues vs. Cash Receipts
• Cash is received BEFORE revenue is earned:
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AFM101 Full Course Notes
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Document Summary
Discontinued operations, the net earnings or loss from a discontinued a component are disclosed separately on. Soe as discontinued operations: earnings per share, = net earnings / average number of shares outstanding. How are operating activities recognized and measured: many local retailers and small business use cash basis accounting which records revenues and expenses when cash is paid regardless of when they were incurred. Accrual accounting: using a cash basis can report higher net earnings because , a customer paid cash in advance of receiving a good or service, the company postponed the payment of utility bills until the next period. Recording revenues vs. cash receipts: cash is received before revenue is earned, cash (+a) xx. Deferred revenue (+l) xx: company delivers, deferred revenue (-l) xx, cash is received on the date revenue is earned: Fee revenue (+r, +se) xx: cash is received after revenue is earned, trade receivables (+a) xx. Fee revenue (+r, +se) xx: cash (+a) xx.
