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Copyright © 2016 by McGraw-Hill Education .
Chapter 3The Income Statement
PowerPoint Author:Brandy Mackintosh, CA
3-2
Learning Objective 3-1
Describe common operating transactions and select
appropriate income statement account titles.
3-3
Operating Activities
Operating activities include buying goods and services from suppliers and employees and
selling goods and services to customers and then collecting cash from them.
3-4
Income Statement Accounts
Time Period Assumption: dividing the company’s long life into shorter chunks of time
such as months, quarters, and years.
3-5
Cash Basis Accounting
Cash basis accounting records revenues when cash
is received and expenses when cash is paid.
3-6
Learning Objective 3-2
Explain and apply the revenue and expense recognition
principles.
3-7
Accrual Basis Accounting
GAAP/IFRSRecords revenues when they are earned and expenses in the same
period as the revenues to which they relate, regardless of the timing of
cash receipts or payments.
Accrual Basis Accounting
3-8
Revenue Recognition Principle
Timing of Reporting Revenue versus Cash Receipts
Revenue Recognition PrincipleRevenues are recognized when they are
earned.
3-9
Expense Recognition Principle (“Matching”)
Timing of Reporting Expenses versus Cash Payments
Record expenses in the same period as the revenues with which they can be reasonably
associated.
3-10
Learning Objective 3-3
Analyze, record, and summarize the effects of operating
transactions using the accounting equation, journal entries, and
T-accounts.
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The Expanded Accounting Equation
3-12
SonicGateway’s Accounting Records(a) Sell games for Cash.
In September, SonicGateway sold $3,000 of games at its online store.
2 Record
(a) Cash (+A) Sales Revenue (+R, +SE) 3,000
3,000
3 Summarize
Beg. Bal.(a)
Cash (A)dr + cr -
20,7003,000
Beg. Bal.(a)
Sales Revenue (R, SE)dr - cr +
03,000
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
(a) Cash +$3,000
SalesRevenue (+R) +$3,000
3-13
(b) Receive cash for future services.
SonicGateway issued three $100 gift cards at the beginning of September.
3 Summarize
Beg. Bal.(a)(b)
Cash (A)dr + cr -
20,7003,000
300
Beg. Bal.(b)
Unearned Revenue (L)dr - cr +
0300
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
(b) Cash +$300
UnearnedRevenue +$300
2 Record
(b) Cash (+A) Unearned Revenue (+L) 300
300
SonicGateway’s Accounting Records
3-14
(c) Sell apps on credit.
SonicGateway sold $9,000 of apps in the App Store and on Google Play.
2 Record
(c) Accounts Receivable (+A) Sales Revenue (+R, +SE) 9,000
9,000
3 Summarize
Beg. Bal.(c)
Accounts Receivable (A)dr + cr -
09,000
Beg. Bal.(a)(c)
Sales Revenue (R, SE)dr - cr +
03,0009,000
SonicGateway’s Accounting Records
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
(c) Accounts Receivable +$9,000
SalesRevenue (+R) +$9,000
3-15
(d) Receive payment on account.
SonicGateway received checks totaling $8,500 from Apple and Google,on account.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
(d) Cash +$8,500 Accounts Receivable -$8,500
2 Record
(d) Cash (+A) Accounts Receivable (-A) 8,500
8,500
3 Summarize
Beg. Bal.(a)(b)(d)
Cash (A)dr + cr -
20,7003,000
3008,500
Beg. Bal.(c) (d)
Accounts Receivable (A)dr + cr -
09,000 8,500
SonicGateway’s Accounting Records
3-16
(e) Pay cash to employees.
SonicGateway wrote checks to employees totaling $7,800 for wages related to hours worked in September.
2 Record
(d) Salaries and Wages Expense (+E, -SE) Cash (-A) 7,800
7,800
3 Summarize
Beg. Bal.(a)(b)(d)
(e)
Cash (A)dr + cr -
20,7003,000
3008,500
7,800Beg. Bal.(e)
Salaries & Wages Expense (E, SE)dr + cr -
07,800
SonicGateway’s Accounting Records
1 AnalyzeLiabilitiesAssets Stockholders’ Equity+
(e) Cash -$7,800
Salaries & WagesExpense (+E) -$7,800
=
3-17
(f) Pay cash in advance.
On September 1, SonicGateway paid $7,200 in advance forSeptember, October, and November rent.
2 Record
(f) Prepaid Rent (+A) Cash (-A) 7,200
7,200
3 Summarize
Beg. Bal.(a)(b)(d)
(e)(f)
Cash (A)dr + cr -
20,7003,000
3008,500
7,8007,200
Beg. Bal.(f)
Prepaid Rent (A)dr + cr -
07,200
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
(f) Cash -$7,200 Prepaid Rent +$7,200
SonicGateway’s Accounting Records
3-18
(g) Incur cost to be paid later.
SonicGateway displayed Facebook sidebar ads inSeptember and received a bill for $500 to be paid in October.
3 Summarize
Beg. Bal(g)
Accounts Payable (L)dr - cr +
10,200500
Beg. Bal.(g)
Advertising Expense (E, SE)dr + cr -
0500
2 Record
(g) Advertising Expense (+E, -SE) Accounts Payable (+L) 500
500
SonicGateway’s Accounting Records
1 AnalyzeLiabilitiesAssets Stockholders’ Equity+
(g) Accounts Payable + $500
AdvertisingExpense (+E) -$500
=
3-19
(h) Pay cash for expenses.
SonicGateway was notified by its bank that an automatic monthly payment of $600 was transmitted to its utility company for electricity use in September.
2 Record
(h) Utilities Expense (+E, -SE) Cash (-A) 600
600
3 Summarize
Beg. Bal.(a)(b)(d)
(e)(f)(h)
Cash (A)dr + cr -
20,7003,000
3008,500
7,8007,200
600
Beg. Bal.(h)
Utilities Expense (E, SE)dr + cr -
0600
SonicGateway’s Accounting Records
1 AnalyzeLiabilitiesAssets Stockholders’ Equity+
(h) Cash -$600 UtilitiesExpense (+E) -$600
=
3-20
Learning Objective 3-4
Prepare an unadjusted trial balance.
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Unadjusted Trial Balance
Cash Ledger Account
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Review of Revenues
3-23
Review of Expenses
3-24
Learning Objective 3-5
Evaluate net profit margin,but beware of income
statementlimitations.
3-25
Net Profit MarginNet Profit Margin
= Net IncomeRevenue
Net income = Revenues – Expenses
= $12,000 - $8,900 = $3,100
0.258or 25.8%
=$3,100
$12,000
=
3-26
Income Statement Limitations
NI Cash
NI Value
NI Exact
Copyright © 2016 by McGraw-Hill Education .
Chapter 3Solved Exercises
M3-2, M3-3, M3-4, M3-5, M3-13, M3-14
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M3-2 Identifying Accrual Basis RevenuesThe following transactions are July activities of Bill’s Extreme Bowling Inc., which operates several bowling centers. If revenue is to be recognized in July, indicate the amount. If revenue is not to be recognized in July, explain why.
Activity Amount or Explanation
a.
b.
c.
d.
Bill’s collected $12,000 from customers for services related to games played in July.
$12,000
Bill’s billed a customer for $250 for a party held at the center on the last day of July. The bill is to be paid in August.
$250
The men’s and women’s bowling leagues gave Bill’s advance payments totaling $1,500 for the fall season that starts in September.
No revenue is earned in July. The revenues will be earned when fall bowling service is provided (i.e., when the games are played).
Bill’s received $1,000 from credit sales made to customers last month (in June).
No revenue is earned in July. The cash collections in July related to revenues earned in June.
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M3-3 Identifying Accrual Basis ExpensesThe following transactions are July activities of Bill’s Extreme Bowling, Inc., which operates several bowling centers. If an expense is to be recognized in July, indicate the amount. If an expense is not to be recognized in July, explain why.
Activity Amount or Explanation
a.
b.
c.
Bill’s paid $1,500 to plumbers for repairing a broken pipe in the restrooms.
$1,500
Bill’s paid $2,000 for the June electricity bill and received the July bill for $2,500, which will be paid in August.
$2,500 was incurred as an expense in July. The $2,000 was an expense in June and is not an expense in July.
Bill’s paid $5,475 to employees for work in July.
$5,475
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M3-4 Recording Accrual Basis RevenuesFor each of the transactions in M3-2, write the journal entry using the format shown in the chapter.
a. Cash (+A) 12,000
Service Revenue (+R, +SE) 12,000 b. Accounts Receivable (+A) 250
Service Revenue (+R, +SE) 250 c. Cash (+A) 1,500
Unearned Revenue (+L) 1,500 d. Cash (+A) 1,000
Accounts Receivable (A) 1,000
3-31
M3-5 Recording Accrual Basis ExpensesFor each of the transactions in M3-3, write the journal entry using the format shown in the chapter.
a. Repairs and Maintenance Expense (+E, SE) 1,500
Cash (A) 1,500
b. Accounts Payable (–L) 2,000Cash (A) 2,000
Utilities Expense (+E, SE) 2,500Accounts Payable (+L) 2,500
c. Salaries and Wages Expense (+E, SE) 5,475Cash (A) 5,475
3-32
M3-13 Preparing Accrual Basis Journal Entries for Business ActivitiesQuick Cleaners, Inc. (QCI) has been in business for several years. It specializes in cleaning houses but has some small business clients as well. Prepare journal entries for the following transactions, which occurred during a recent month, and determine QCI’s preliminary net income.
a. Issued $25,000 of QCI stock for cash.b. Incurred $600 of utilities costs this month and will pay them
next month.
a. Cash (+A) 25,000 Common Stock (+SE) 25,000
b. Utilities Expense (+E -SE) 600 Accounts Payable (+L) 600
3-33
M3-13 Preparing Accrual Basis Journal Entries for Business Activitiesc. Paid wages for the current month totaling $2,000.d. Performed cleaning services on account worth $2,800.e. Some of Quick Cleaners’ equipment was repaired at a total
cost of $150. The company paid the full amount at the time the repair work was done.
c. Salaries and Wages Expense (+E -SE) 2,000Cash (-A) 2,000
d. Accounts Receivable (+A) 2,800Service Revenue (+R +SE) 2,800
e. Repairs and Maintenance Expense (+E -SE) 150Cash (-A) 150
Preliminary Net Income = Revenues – Expenses = $2,800 - $2,000 - $600 - $150 = $50
3-34
M3-14 Preparing Accrual Basis Journal Entries for Business ActivitiesJunktrader is an online company that specializes in matching buyers and sellers of used items. Buyers and sellers can purchase a membership with Junktrader, which provides them advance notice of potentially attractive offers. Prepare journal entries for the following transactions, which occurred during a recent month, and determine Junktrader’s preliminary net income.a. Junktrader provided online advertising services for another
company for $200 on account.b. On the last day of the month, Junktrader paid $50 cash to
run an ad promoting the company’s services. The ad ran that day in the local newspaper.
a. Accounts Receivable (+A) 200Service Revenue (+R +SE) 200
b. Advertising Expense (+E -SE) 50Cash (-A) 50
3-35
M3-14 Preparing Accrual Basis Journal Entries for Business Activitiesc. Received $200 cash in membership fees for the month from
new members.d. Received an electricity bill for $85 for usage this month. The
bill will be paid next month.e. Billed a customer $180 for helping them sell their junk. The
customer is expected to pay by the end of next month.
c. Cash (+A) 200Service Revenue (+R +SE) 200
d. Utilities Expense (+E -SE) 85Accounts Payable (+L) 85
e. Accounts Receivable (+A) 180Service Revenue (+R +SE) 180
Preliminary Net Income = Revenues – Expenses = $200 + $200 + $180 - $50 - $85 = $445
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End of Chapter 3