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Lecture Financial accounting (7/e): Chapter 3 - Robert Libby, Patricia A. Libby, Daniel G. Short

Chapter 3 - Operating decisions and the income statement. In this chapter we will discuss how business activities affect the income statement of a company. We will also look at how these activities are recognized, recorded and measured. Finally, we will look at the preparation of an income statement. | Operating Decisions and the Income Statement Chapter 3 Chapter 3: Operating Decisions and the Income Statement. To understand how business plans and the results of operations are reflected on the income statement, we need to answer the following questions: How do business activities affect the income statement? How are business activities measured? How are business activities reported on the income statement? Understanding the Business How do business activities affect the income statement? How are these activities recognized and measured? How are these activities reported on the income statement? In this chapter we will discuss how business activities affect the income statement of a company. We will also look at how these activities are recognized, recorded and measured. Finally, we will look at the preparation of an income statement. The Operating Cycle Begin Purchase or manufacture products or supplies on credit. Deliver product or provide service to customers on credit. Pay suppliers. Receive payment from customers. The business cycle begins with the purchase or manufacture of a product for sale. When products are purchased from suppliers, those suppliers must be paid. After a sale has been made, the company must deliver the product or service to the customer. Many business sales are made on credit. If credit is extended, payment must be received from customers. Once the cash has been collected from customers, the business cycle begins all over again. We never want to confuse the business operating cycle with the accounting cycle. Companies (1) acquire inventory and the services of employees and (2) sell inventory or services to customers. The operating (or cash-to-cash) cycle begins when a company receives goods to sell (or, in the case of a service company, has employees work), pays for them, and sells to customers, then ends when customers pay cash to the company. The length of time for completion of the operating cycle depends on the nature of | Operating Decisions and the Income Statement Chapter 3 Chapter 3: Operating Decisions and the Income Statement. To understand how business plans and the results of operations are reflected on the income statement, we need to answer the following questions: How do business activities affect the income statement? How are business activities measured? How are business activities reported on the income statement? Understanding the Business How do business activities affect the income statement? How are these activities recognized and measured? How are these activities reported on the income statement? In this chapter we will discuss how business activities affect the income statement of a company. We will also look at how these activities are recognized, recorded and measured. Finally, we will look at the preparation of an income statement. The Operating Cycle Begin Purchase or manufacture products or supplies on credit. Deliver product or provide service to customers on credit. .