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Measuring Financial Performance

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  1. Measuring Financial Performance

  2. The Income Statement(also known as the Profit & Loss (or P&L) Statement)

  3. Income Statement Layout (UK) • Note: • No tax • Non-operating income • Depreciation expense explicit

  4. The Income Statement – Standard Format * Operating profit not separated out; Depreciation expense part of S, G & A and not shown explicitly; Taxes listed separately.

  5. Cost of Goods Sold (COGS) is usually not calculated item-by-item, but rather determined at the end of the accounting period by measuring the net change in inventories..

  6. The classification of expenses is somewhat subjective. Small expenses are usually grouped together. Note: Not all “activities” are expenses. For example, “Heat and Light” and “Insurance” could have bee grouped together as “daily office utilities” totaling £1,650.

  7. Accounting Cycle and Revenue Recognition: Suppose a customer orders a product – like a new car, say. When could revenue reasonably be recognized? Question: What about property developers who collect deposits on unfinished condominium or housing projects?

  8. The main criteria for revenue recognition are…

  9. Revenue Recognition on Long-Term Contracts • Recognize according to work breakdown schedule of percentage of completion.

  10. Expense Recognition & the Matching Principal

  11. (See Figure, next slide)

  12. Accrued Expenses: Time Related

  13. Accrual Accounting