Measuring Income to Assess Performance
A. Accounting Period
1.Calendar year – Jan 1 to Dec 31
2.Fiscal year – Start anytime; end 365 days later
annual financial reports
remark:中国大陆规定与calendar year一致
3.Interim periods – weekly, monthly, quarterly
4.Operating cycle
5. Periods of financial reports:Annual/Semiannual/Quarterly
B.Accrual Basis vs Cash Basis
Accrual Basis: Revenues are recognized when earned and expenses are recognized when incurred
Cash Basis:Revenues are recognized when cash is received and expenses recorded when cash is paid
GAAP->Accrual Basis
1.Revenue Recognition
Earned:has completed all or substantially all that it has promised to its customer
+
Realized:Receive cash or claims to cash Realizable: Receive assets that are readily convertible into cash or claims to cash
2.The Matching Principle
costs and expenses <-> related revenues: recognized in the same period
remark:Matching process determines the amount of net income reported on the IS
a.Product costs(产品成本)：more closely tied to products, linked with the revenues earned that period
eg. COGS
b.Period costs(期间成本)：linked with the time period itself
eg.Rent, Administrative Expense
remark: staff->administrative; worker->product;
remark: prepaid rent belongs to asset
2'.Applying Matching
Acquisition Expiration
Assets Expenses
Unexpired costs Expired costs
eg. Inventory, Prepaid Rent, Equipment eg.COGS/RentExpense/DepreciationExpenses
->
Instantaneously Or Eventually Become
remark:Depreciation is the systematic allocation of the acquisition cost of long-lived assets to the periods that benefit from the use of the assets
Land is not subject to depreciation because it does not deteriorate over time
C.Statement of Retained Earnings
1. Cash Dividends
Distributions of cash to stockholders
Leads to a reduction in retained earnings
Dividends are not deducted from revenues in arriving at net income as they are:
Not directly linked to the generation of revenue or cost of operating activities
Voluntary distributions of cash to stockholder
a. Important Dates of Cash Dividends
Declaration date
Liabilities (Dividends Payable) increase;Retained Earnings decrease
Record date
Payment date
Assets (Cash) and liabilities (Dividends Payable) decrease
2.Form
Retained earnings, a specific date
Add: Net income for a specific period of time
Total
Less:Dividends declared
Retained earnings, a specific date
3. Changes in stockholders' equity
a. Net income / Net loss
b. Transactions with shareholders : Declaration of dividends,Issuance or repurchase of stock
c.Other comprehensive income (OCI):Items in OCI are not part of paid-in capital or retained earnings+Items in OCI become part of Accumulated other comprehensive income (AOCI)
4.Statement of Income and Retained Earnings
Sales
Deduct expenses:
Cost of goods sold
Rent
Depreciation
Net income
Retained earnings, a specific date
Less: Dividends declared
Retained earnings, a specific date
5.Expanded Balance Sheet Equation
Assets = Liabilities + Paid-in Capital + Retained earnings
( Beginning balance + Revenues - Expenses - Dividends)
6.The Components of Retained Earnings
Beginning balance of retained earnings+Net income(-Net loss) for the period-dividends for the period=Ending balance of retained earnings
(Net income(Net loss)=Revenues for the period-Expenses for the period)
7.Expanded Balance Sheet Equation
Assets = Liabilities + Stockholders’ Equity
(Paid-in Capital + Retained Earnings)
(Revenues – Expenses –Dividend)
8.Relationship Between Income Statement and Balance Sheet