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Chapter 5 Notes

Chapter 5 Notes. The Unit 2 test (covering chap 4 and chap 5) will occur on Wed October 15. Fiscal Period. Fiscal Period is same as accounting period . Fiscal period is the period of time over which earnings are measured.

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Chapter 5 Notes

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  1. Chapter 5 Notes The Unit 2 test (covering chap 4 and chap 5) will occur on Wed October 15

  2. Fiscal Period • Fiscal Period is same as accounting period. • Fiscal period is the period of time over which earnings are measured. • What happens if the income statement does not mention “when” part of the title? • The readers have no idea whether the net income is from one month of business operation or one year of business operation or one quarter of business operation.

  3. Fiscal Period • The most common fiscal period for small business is one year. The most common fiscal period for big corporation is one quarter ( = 3 months) • The fiscal year does not have to be same as the calendar year. • For example, fiscal year can be May 1 to April 30 of next year. • If the income statement cover one quarter starting from Nov 1 to January 31. How would you write down in the income statement?

  4. Time Period Concept (GAAP) • Time period concept is an accounting standard that provides accounting will take place over consistent fiscal periods. • These fiscal periods have to be (are usually) consistent such as one month, one year or one quarter. • In order to compare the performance of managers or of the employees, the owner (or manager) usually likes to see several income statements such as income statement of 2010, 2011, 2012 and 2013. • Then they can easily see the trend.

  5. Revenue Recognition Principle • It requires that revenue should be recorded in the accounts at the time the transaction is completed. • Transaction is completed = The service is provided or the customer received the goods. • This accounting principle should be honored under both Canadian GAAP and IFRS. • For example, if a customer buys laptop from Futureshop on credit on Setpember 1st. The customer pays the money on October 15. When can futureshop record this transaction as revenue? • The futureshop should recognize the transaction on September 1st.

  6. The Matching Principle • Separating revenue and expenses into specific fiscal periods (such as one month or one year) means that accountant must follow two steps: • They must be careful to record the proper amount of revenues in the proper period. • They must subtract only those expenses which helped earn the revenue they recorded in step one.

  7. The Matching Principle • For most transactions, recording the proper revenue is easy because accountants mechanically follow the revenue recognition principle. • The matching principle states that each expense item must be recorded in the same period as the revenue that the expense helped to earn.

  8. The Matching Principle • If accountants do not follow matching principle, net income numbers will be incorrect, meaning income statement will show incorrect information. • For example, if Futureshop purchased “flyer service” from marketing company (called MR Printing) on Nov 1, 2014 which will be used for boxing day sale (December 26, 2014). • Futureshop will pay the service fee on January 15, 2015. (The flyer service fee is $2000.)

  9. The Matching Principle • The fiscal period ends on December 31, when will they record the advertising expense? • The futureshop will record this advertising expense in 2014 income statement because this expense was used to generate the 2014 revenue. • How will the futureshop record the transactions? • On November 1st, the accountant will credit AP – Park Press account and debit advertising expense account.

  10. The Matching Principle • On December 15, the accountant will debitAP – Park Press account and creditBank account. • If the flyer was for the two weeks of December 24, 2014 to January 7 2015, then would the transactions be different? • Only half of the advertising expense (=$1000) will be recorded in 2014 income statement and the rest of $1000 will be recorded in 2015 income statement.

  11. The Matching Principle • What is matching principle?

  12. The Matching Principle • What if this company made income statements every month? In which month, should they record this advertising expense? • This advertising expense should be recorded in December 2014 Income Statement. (rather than Nov 2014 IS)

  13. The Matching Principle • If a construction company has two year building project in Mississuaga downtown. They will receive $10 million on December 31 2013. They started the building project January 1, 2012. • By December 31, 2012, accountant realizes that the construction company already incurred 3 million dollar expense for this project. (and half of the work is done.)

  14. The Matching Principle • What happens if he just follows revenue recognition principle? • He must wait until Dec 31, 2013 in order to record the revenue. • What happens if he follows matching principle? • He can record half of the revenue at the end of 2012. • Which one (RRP or MP) delivers more accurate net income numbers for 2012 and 2013? • Generally speaking MP provides more consistent and reasonable net income numbers.

  15. Classwork / Homework • P149 review questions #2, 4, 8, 9 • P150 Exercise #1 and #5 • P166 Review EX #4 • I will take up P150 Ex #2 today. (was HW for yesterday)

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