Chapter03-OperatingDecisionsandtheAccountingSystemChapter3OperatingDecisionsandtheAccountingSystemANSWERSTOQUESTIONS1.Atypicalbusinessoperatingcycleforamanufacturerwouldbeasfollows:inventoryispurchased,cashispaidtosuppliers,theproductismanufacturedandsoldoncredit,andthecashiscollectedfromthecustomer.2.Thetimeperiodassumptionmeansthatthefinancialconditionandperformanceofabusinesscanbereportedperiodically,usuallyeverymonth,quarter,oryear,eventhoughthelifeofthebusinessismuchlonger.3.NetIncome=Revenues+Gains-Expenses-Losses.Eachelementisdefinedasfollows:Revenues--increasesinassetsorsettlementsofliabilitiesfromongoingoperations.Gains--increasesinassetsorsettlementsofliabilitiesfromperipheraltransactions.Expenses--decreasesinassetsorincreasesinliabilitiesfromongoingoperations.Losses--decreasesinassetsorincreasesinliabilitiesfromperipheraltransactions.4.Bothrevenuesandgainsareinflowsofnetassets.However,revenuesoccurinthenormalcourseofoperations,whereasgainsoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleissellinglandatapriceabovecost(atagain)forcompaniesnotinthebusinessofsellingland.Bothexpensesandlossesareoutflowsofnetassets.However,expensesoccurinthenormalcourseofoperations,whereaslossesoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleisalosssufferedfromfiredamage.5.Accrualaccountingrequiresrecordingrevenueswhenearnedandrecordingexpenseswhenincurred,regardlessofthetimingofcashreceiptsorpayments.Cashbasisaccountingisrecordingrevenueswhencashisreceivedandexpenseswhencashispaid.FinancialAccounting,8/e3-1©2014byMcGraw-HillGlobalEducationHoldings,LLC.Thisisproprietarymaterialsolelyforauthorizedinstructoruse.Notauthorizedforsaleordistributioninanymanner.Thisdocumentmaynotbecopied,scanned,duplicated,forwarded,distributed,orpostedonawebsite,inwholeorpart.Chapter03-OperatingDecisionsandtheAccountingSystem6.Thefourcriteriathatmustbemetforrevenuetoberecognizedundertheaccrualbasisofaccountingare(1)deliveryhasoccurredorserviceshavebeenrendered,(2)thereispersuasiveevidenceofanarrangementforcustomerpayment,(3)thepriceisfixedordeterminable,and(4)collectionisreasonablyassured.7.Theexpensematchingprinciplerequiresthatexpensesberecordedwhenincurredinearningrevenue.Forexample,thecostofinventorysoldduringaperiodisrecordedinthesameperiodasthesale,notwhenthegoodsareproducedandheldforsale.8.Netincomeequalsrevenuesminusexpenses.Thusrevenuesincreasenetincomeandexpensesdecreasenetincome.Becausenetincomeincreasesstockholders’equity,revenuesincreasestockholders’equityandexpensesdecreaseit.9.Revenuesincreasestockholders’equityandexpensesdecreasestockholders’equity.Toincreasestockholders’equity,anaccountmustbecredited;todecreasestockholders’equity,anaccountmustbedebited.Thusrevenuesarerecordedascreditsandexpensesasdebits.10.ItemIncreaseDecreaseRevenuesCreditDebitLossesDebitCreditGainsCreditDebitExpensesDebitCredit11.ItemDebitCreditRevenuesDecreaseIncreaseLossesIncreaseDecreaseGainsDecreaseIncreaseExpensesIncreaseDecrease12.TransactionOperating,Investing,orFinancingDirectionoftheEffectonCashCashpaidtosuppliersOperating–SaleofgoodsonaccountNoneNoneCashreceivedfromcustomersOperating+PurchaseofinvestmentsInvesting–CashpaidforinterestOperating–IssuanceofstockforcashFinancing+3-2SolutionsManual©2014byMcGraw-HillGlobalEducationHoldings,LLC.Thisispro...
